Impacts of Currency Manipulation on Business

Currency manipulation may not be the top item on your company's risk mitigation checklist. After all, there's not a lot that businesses can do when it comes to governmental financial policies. The fact remains, however, that currency manipulation and the fluctuating purchasing power of the dollar can have as much of an impact on business as other common factors like interest rate hikes and market liquidity.

When vying for market share and business in new regions, the value of the dollar and other currencies can play a large part in a company's overall competitiveness. When countries intentionally devalue their currency, sectors in other countries may find themselves on the losing end of global trade.

To truly understand the commercial implications of currency manipulation, it's important to go beyond the headlines and understand exactly how and why governments opt to undervalue their currencies to give their businesses a competitive edge. Read on for more about how currency manipulation and a weak dollar impact U.S. businesses abroad—and even at home.

Why Governments Manipulate Currency Value

It may appear at first blush that most governments would want their currency to be as valuable (or strong, in popular parlance) as possible. A strong dollar means more purchasing power for consumers who are buying foreign goods and shopping abroad, as well as higher prices for American-made exports on the international market.

When a currency is strong, however, it also makes it harder for exports to capture as much of the market as possible. This is particularly true when governments intentionally devalue their currency, helping industries flood the global market with more competitively priced goods.

China, for example, may devalue the yuan in order to make Chinese-made goods less expensive on the foreign market. If the yuan has a lower value, goods from China are inherently discounted due to exchange rates. Countries with more valuable currency have increased buying power when purchasing Chinese imports due to the discrepancy in value, which in turn helps Chinese factories produce and sell goods at higher volumes.

Currency values do fluctuate over time. But when a central government intentionally deflates the value of their own currency, they are often able to dominate key export markets. This allows them to gain more market share in certain industries and make it more difficult for other countries' manufacturers to compete on pricing. A centralized economy, as seen in China and elsewhere, means currency value can be controlled more easily than in other countries whose governments take a more hands-off approach.

Currency Manipulation and International Business

The U.S. dollar has had a bumpy road ever since hitting a high in 1985. A weak dollar may sound like a problem for business and investors alike, but it's often a boon for manufacturing and international trade. For starters, a weak dollar makes it more affordable for other countries to buy American-made goods. This spurs growth in the U.S. manufacturing sector, as well as other parts of the economy that rely on international trade for the bulk of their revenue. The more demand there is for affordable American imports abroad, the more work orders domestic companies can fill—thus creating jobs and keeping the economic gears churning at home.

Foreign markets that have relative purchasing parity with the United States may be more inclined to import American goods versus buying from other countries, or by building up their own domestic manufacturing infrastructure in a certain sector. Free trade agreements reduce financial barriers to doing business with American companies as well, which further entices international markets to purchase U.S. goods. This often leads to a trade surplus—a phenomenon in which countries export more than they import.

How Currency Manipulation Affects Domestic Business

Even businesses that rely solely on the domestic market can stand to lose out due to currency manipulation. When countries undervalue their currency, domestic companies are less able to price match imports from their foreign competitors. These practices often go hand-in-hand with dumping, a practice in which foreign producers sell their products on the global market at prices that are far below what the market dictates. This can make it nearly impossible for other producers to maintain market share or grow their own footprint.

Trade surpluses due partly to a weak dollar can convey economic strength and promote job expansion, but can also lead to higher prices and inflation domestically. Finding the right balance between a weak and strong dollar is a tightrope act, balanced in large part by the Federal Reserve as it raises or lowers the interest rates large banks use when borrowing money from the federal government.

What Businesses Can Do About Currency Manipulation

Businesses may not be able to directly affect changes to global trade policy, but there are actions they can take to safeguard themselves from some of its worst impacts.

For one, all business leaders—but particularly those who do business abroad—stand to benefit from understanding and mastering their company's cash flow. Maintaining positive cash flow is a strong sign of a company's fiscal health, and keeping a close watch on this metric can help company leaders head off unexpected financial challenges. Plus, a healthy cash flow allows businesses to make strategic decisions more quickly in the event that they need to pivot their operations.

In addition, building strategic cash reserves can complement cash flow management by giving companies enough of a liquid cushion to offset potential commerce disruptions from foreign competitors. Most companies can build their strategic cash reserves by reducing spending, increasing profit margins, or by divesting from non-liquid holdings (such as real estate or financial investments).

And lastly, for companies that deal directly with the financial effects of currency manipulation within their global market, locking in contracts with suppliers and clients can also hedge against future losses. As one example of this strategy, drafting forward contracts can help lock in prices for the medium- and long-term. By working with high-volume or longstanding clients, companies can help hedge against pricing volatility while also ensuring that their clients have an uninterrupted supply of goods or services.

Currency manipulation can pose a challenge for governments and businesses alike. Although business leaders may not be able to change currency manipulation or currency values on their own, there are proactive steps that they can take to gird themselves against the financial and commercial challenges that valuation issues create. Having a savvy financial team in place, in addition to diligent cash flow management, can help businesses weather these and other challenges that come with selling in the global marketplace.