The U.S. dollar has risen 30%-40% against major world currencies since 1995. As the U.S. economy improves and productivity levels continue to rise, the dollar is likely to climb even higher. However, some analysts predict the euro will gain in value next year and even challenge the dollar for world dominance.

Europeans Want To Do Business in Euros

According to the Conference Board, a research organization, 60% of world trade is currently denominated in dollars. In the unlikely event that the greenback falls from first place, a position it’s held since usurping the British pound after World War I, more global business will be conducted in euros.

But, even if the value of the euro remains weak and the dollar remains strong, more and more European companies will request that their suppliers conduct business in euros. Satisfying this request may give you an edge over the competition. It will also add risk.

If you’re not already dealing in the currency, consider printing your price lists in euros for European customers. This may require adjusting your ledgers, receivables and other financial systems. Additionally, to effectively deal with two currency denominations, you may need to invest in new software, training, consulting, and dual documentation systems. Unfortunately, due to the costs involved, many U.S. companies have not taken the appropriate steps and are unprepared. This could lead to missed trans-Atlantic opportunities.

The Euro Has Been Totally Phased In

The euro has been used for non-cash transactions since January 1999. However, during 1Q02, members of Euroland implemented the final transitional phase that called for the total elimination of their national currencies. Euroland, also known as the Eurozone and the Euro area, is the name given to the bloc of 12 of the 15 European Union (EU) members (see pages 1-2) that have accepted the euro as their official currency. The remaining EU members, the United Kingdom, Sweden, and Denmark (which rejected Euroland membership in a national vote on September 28, 2000), are likely to adopt the single currency at some future time.

The Euro-Dollar Perspective

Since its inception in January 1999, the euro has reached a high of $1.19, fallen to a low of $.82, and closed at approximately $.90 on May 1, 2002. As the value of the euro dips, the cost of U.S. exports to Euroland rise, while Euroland exports to the U.S. become less expensive, increasing U.S. demand. Since every 1% rise in the U.S. dollar’s trade-weighted value boosts the U.S. current account deficit by at least $10 billion, according to Fred Bergsten of the Institute for International Economics, the long-term impact on the U.S. economy could be severe.

On the investment side, U.S. companies interested in purchasing European assets get more for their money. But, U.S. firms already invested in Europe generate smaller profits when converting their euros into dollars.

Currency Volatility: A Constant Risk

Dealing with any foreign currency involves a level of risk. Just since 1995, for example, 13 emerging market currencies declined by more than 40%. The good news: the Argentine peso devaluation has not brought other currencies down with it. To learn more about doing business in euros and to protect yourself against adverse currency fluctuations, contact your banker.

About The Author John Manzella [Full Bio]

John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.




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