The dollar goes on A Wild Ride 

Today’s headlines are full of references to the strong dollar and its implications for global business. A common theme is that multinational corporations are experiencing headwinds (finance-speak for “it’s costing them money”) from a surging greenback. 

An examination of dollar movement over the last 50 years shows that up-and-down trends are typical. For most of that time, the dollar was moving directionally. But we are now witnessing a rising dollar driven by multiple forces, primarily a U.S. central bank pushing higher interest rates.

History shows that extended moves in the dollar have occurred seven times since the end of Bretton Woods in 1971. These moves generally lasted between six and ten years. The smallest movement was 27%, and the largest was a whopping 90%.

Date

Event

DXY

1971-1979

Post Bretton Woods

30% DROP

1979-1985 

Volcker shock

90% RISE

1985-1995

The Plaza Accord

50% DROP

1995-2002

Tech boom and weak European economy

39% RISE

2002-2008

Rise of the euro

38% DROP

2014-2016

Fed raises rates

29% RISE

2021-?

Inflation pushes Fed to raise rates

27% RISE (so far)

Trends in the Dollar

The fundamentals that drive currency flows over long periods are macroeconomic conditions that usually remain in place for years. However, markets are like pendulums; they almost always swing from too low to too high. Rarely do they stop in the middle, even though that may be the right price based on economic fundamentals. In other words, trends tend to overshoot logical valuations. Central banks can slow the movement in currencies, but their tools are inadequate to halt the open market’s multi-trillion dollar flows that drive pricing in the global foreign exchange markets. 

Takeaways

• The dollar is dynamic, primarily moving up or down and occasionally sideways. Companies doing business across borders must prepare for changing currency prices.
• The current trend is likely to continue. The rise in the dollar has lasted 17 months, and most dollar trends last much longer.
• At some point, the trend will reverse, and the dollar will drop. That move will present a whole new set of risk management issues.  

The key to managing FX risk is preparation. Know the likely risks for your company and develop a plan, like a hedging strategy, to ensure that a big move in FX will not ruin your quarter or irreparably damage your business. Historically, hedging FX has been a cumbersome and difficult process. This is why Pangea developed Pangea Prime, an end-to-end technological solution that manages your FX risk. With Pangea Prime, your company can focus on its products and services, no matter how volatile forex markets are.

Schedule a demo today and see how you can take control of your FX risk.

Pangea Prime, predictable, simplified, FX management.