Corporate Foreign Exchange: How to Manage Against a Strong Dollar

As summer 2022 heats up, the Eurozone is seeing record high temperatures and record lows in its currency value! However, whilst the Euro and many other global currencies are plummeting, the US dollar continues to remain strong. This has many different implications for both business, expats and travellers and while some are benefiting from the strong dollar, others are really not.

In this post we will examine exactly what it all means for business, what can be done about it and how Corporate FX service providers can help.

Forex Markets and Corporate FX in 2022Firstly, let’s start by taking a look at exactly what is happening and why.

After taking something of a hit during the peak of the global COVID-19 pandemic, the US dollar rallied toward the end of 2021 and into 2022. Right now, the USD is trading at £0.83 against the pound sterling ( from £0.71 earlier this year) and right now is approaching parity with the Euro trading at €0.98 (from €0.82 earlier this year).

This is partially caused by instability in the Eurozone as well as the war in Ukraine. However it isn’t only European currencies that are being humbled by the mighty dollar, the Chinese Yuan is also now trading at 6.74 from 6.32 earlier in 2022.

The usual naysayers are predicting a “doom loop” and eventual dollar crash but the fact is that in the here and now, the dollar appears to be holding.

What This Means For Business Foreign Exchange

Any American business that buys goods or engages contractors from abroad will find that its operating costs are reducing as import costs and supplier invoices become 10 – 20% cheaper.

On the other hand, foreign travellers hoping to visit the US will find it to be an especially expensive time to visit. Likewise, any business that imports goods or services from the US and pays in dollars will find itself paying 10 – 20% more and may not be able to pass these costs onto their already squeezed domestic customers.

How Business Foreign Exchange Can Help Businesses on both sides of the dollar divide are wondering what they can now do to either maximise the benefits of the strong dollar, or alternatively negate its adverse effects. In both cases, Corporate Foreign Exchange providers may be able to help.

To clarify, a Corporate FX company is a non-bank foreign exchange company that offers currency exchange, international payment, and other Forex services to businesses. Let’s now look at a few different ways in which they can help.

Corporate Currency Exchange: Hedging and Currency Forward Contracts

Lets imagine we run a US based company that imports Italian coffee makers and sells them to stateside clients. Right now, the historic USD-EUR exchange rate means that the coffee makers are now 15% cheaper for us to buy than usual.

Our company is therefore very eager to make the most of the exchange rate, but does not have the capital to buy a bulk load of coffee makers. What we can instead do is engage in a bit of FX hedging and enter into a Currency Forward Contract with a Business FX broker.

This means that we agree to buy an agreed amount of Euros in the future, but at today’s rate. Therefore, we can buy the Euros in 6 months time and use them to buy the next batch of coffee makers. The advantage for us is that we ‘lock in’ this historic exchange rate which will in all probability have recovered a bit in 6 months time.

But what about any foreign business that is struggling with the strong dollar? How can Corporate FX services help them?

Firstly, many Corporate FX providers allow business clients to hold a foreign currency balance. Therefore, it is possible that a business based in the Eurozone bought themselves a reserve of US dollars 6 – 12 months ago and left them stashed away in their account to use on a rainy day such as this.

Other ways that business foreign exchange can help is by providing account management, corporate banking, and advisory services to help their clients take advantage when the rate does move a bit, and by offering low cost corporate payments abroad that can help them save money on fees when they do need to send money to their suppliers in the US.

Finally, a currency broker can also help a client to get a rate that is above the bank exchange rate on large transactions.

Who Is Business FX For?

Traditionally speaking, Corporate FX, like corporate banking services, was considered to be something that big companies and corporations used, but not smaller ones. This is partially because the savings that can be made by using Corporate FX are often relatively marginal, and only make a significant difference ‘at scale’. Furthermore, historically speaking smaller companies simply did not tend to do all that much business with foreign clients.

However, these days more and more businesses are doing more and more global business. Even “side hustlers” running websites from home are now trading with clients on the other side of the world. And of course, the forex markets of 2022 have proven to be especially tempestuous and may continue to be so. Therefore, effectively using Corporate FX services right now could help a business to make considerable savings or boost profits by getting the right advice and locking in the best possible rates.

Finally, the Corporate currency exchange sector itself is now so buoyant that there are now service providers specifically catering for all kinds of different businesses from multinational corporations to SMEs and sole traders.

Final Thoughts on Corporate Foreign Exchange

Whether a business is looking to save costs on making corporate payments abroad, is looking for the nest rates on corporate currency exchange or simply needs help with its corporate banking, using the right provider at the right time can prove invaluable.