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Weak Euro - Positive or Posion ?

By: Greg Seminara,Expor Solutions
Topics: Weak Euro

The Euro trades at $1.10 to the US Dollar in mid August, down 25 % from $1.43 three years ago. Europe's current financial situation suggests that the Euro will not rebound soon and more likely to suffer continued devaluation versus the dollar. This trend represents good news for European exporters but a tough challenge for those exporting into the euro zone.

Dollar- Euro Exchange: Global Implications
USA population totals 324 million people. Approximately 333 million people live in European countries  with the euro as their designated currency. However, the reach of these two currencies extends far beyond this group of 650 million citizens. Middle East, Latin America, and Asia contain countries that peg their currencies to the dollar. Similarly, there are countries in Europe and Africa that peg their currency to the euro. Most oil is priced in the dollars. 62 % of Global currency reserves are held in dollars, 25 % in euro's, and 4 % in UK pounds. Everyone is touched by the benchmark dollar-euro exchange rate.

Corporate Earnings Impact
American companies with large European businesses will see a painful hit to their earnings reports due to currency translation plus soft business conditions. Both Procter & Gamble and Phillip Morris cut earnings forecasts due to the strength of the dollar. On the flip side, European companies with large USA businesses such as Barilla & Danone should benefit. The impact could be far reaching , as revenue shortfalls at multinationals could trigger a decline in the stock market. This could test consumer confidence which is already shaky at best .

European Exporters: Golden Opportunity in the Americas/Middle East ?
Made in Europe goods are more price competitive now than at any time in the past five years.
Most European brands maintain a presence in the USA and Canada,
but with relatively low development . Similarly, European brands achieved strong progress in the UAE (Dubai) but lag behind in Saudi Arabia, the regional powerhouse of 30 million people. Saudi Arabia pegs their riyal currency to the dollar. Savvy export managers can offer more competitive pricing or use the differential to fund increased promotional activity. The America's and Middle East are growing, offering a worthwhile place to focus  investment.

Review Your Calculation Now !
Many USA importers adjust the dollar-euro exchange rate once per year. Recently, I have examined calculations that based  USA pricing for 2015 at $1.30 to the dollar. This provides the importer with a positive benefit of around .11 cents under this scenario. Of course, there may be an issue with inventory at different rates throughout the supply chain . There is always a delicate balance with exchange rates and both sides should seek a fair model. One option is for European exporters to price in dollars, assuming the currency risk. At a minimum, all should review their calculations to confirm that agreed to benchmarks are in place , with any currency benefit directed to brand building activities.

Problems for Made in USA Exporters ?

While European exporters may benefit, products "Made in USA" face significant price increases across the pond. This is tricky given the intense downward pressure on negotiations across Europe. The slim  hope is that many of the USA's most successful exporters have unique products or brands that may not be as price sensitive. USA dollars converted to Euro's will create larger marketing budgets to invest in brand development activities such as sampling and promotion.  Reduced European demand for USA products may accelerate USA export focus to Asia, Middle East, and the Americas.

Marketers not Currency Traders
Export managers are experts at brand building and new market entry. The "Financial guys" are far more adept at managing currency fluctuations and the unreliable science of predicting the future direction of the financial markets. Fortunately, veteran financial managers have dealt with the continuous cycle of currency fluctuations for years. Larger companies may hedge currency bets,but most small-mid size companies do not. Link with your financial manager and executive team to discuss implications. The important activity is to play out likely scenarios now. No one likes a year end surprise!

Next Steps
The most critical next step is to review your price calculations for all markets aligned wit the US dollar.
Is an adjustment required to the formula ? Should you shift your model to pricing in dollars ? In some cases, Export Solutions recommends that exporters and distributors establish a currency benchmark , with a range of 5 % in either direction. Currency moves "outside the 5 %  band" trigger an automatic review. Consider your USA business plan. Is now the time for a new push or heavier investment behind more competitive factory pricing from Europe? Elevate the currency exchange rate issue  at management meetings. The rate movement is out of our control, but highlighting "risks and rewards" keeps us close to business reality.