Nose-diving dollar is a bigger worry than sterling
Exporters are increasingly being tasked with knowing what will happen to their sales to the UK if a hard Brexit comes to pass and sterling continues to fall.
So far this year, we have seen a 9.1% fall in the value of sterling against the euro, wiping out the margin for many of the small exporters who rely exclusively on the UK market for export sales.
Hedging forward on sterling to offset the effects on profit margins has become much more common among exporters since the collapse in its value against the euro in 2009. Back then, the Bank of England pushed down its value through the so-called quantitative easing process, to boost the UK economy post-crises. This inevitably created a crisis among Irish exporters.
This time around, exporters have been able to maintain their UK sales, partly due to currency hedging and partly through profit margin reduction. The question is, how long before the hedging runs out and margin reduced cashflow creates havoc with the business?
Even more devastating for exporters, particularly our larger companies, is the plummeting US dollar making any marketing forecast for the US unpredictable.
Already this year, the US dollar has fallen by 14.3%, knocking over €2bn off the margins of companies headquartered in Ireland and selling into the US, before currency corrections. This is the lowest point since 2004, when George W Bush’s re-election did nothing to halt the falling dollar.
The significant fall in the dollar has caught many analyst by surprise and probably was the cause of the sudden fall last week in the share price of convenience food producer Greencore, which issued a statement in response to a 8.6% drop in its share price within a week.
“The group is not aware of any developments since the release of its third-quarter trading statement on July 27 that changes the outlook contained in that statement,” said chief executive Patrick Coveney.
However, investors will be aware that Greencore, since its acquisition of Peacock Foods last year, is now heavily exposed to the US market. Repatriated profits from the US, if the dollar remains weak, will fall severely.
Past US presidents have refrained from talking about the strength or weakness of the dollar. Not so Donald Trump, who has repeatedly slammed countries for what he calls artificially weakening their currencies to make their exports more competitive. He has targeted China in particular, saying on the campaign trail that he wanted to label the country a currency manipulator on day one of his administration.
Mr Trump’s assertion back in April that the “dollar is getting too strong” led to a sharp decline in the value of the greenback. The market’s reaction was a reminder that presidents often get the dollar they want. The irony here is the anticipation of many of his other policies, such as proposed tax cuts, deregulation plans, and Obamacare reform, originally strengthened the dollar after his election, but his abject failure to implement any of these policies has led to the undermining of the currency.
F ederal Reserve head Janet Yellen continued to try and smooth expectations and concerns during the recent Jackson Hole symposium in Kansas. As long as the decline of the US dollar is smooth, there is no problem. However, if the dollar continues to plummet, the world faces a full-blown currency crisis once again.
ECB president Mario Draghi, also speaking at the US symposium, avoided any reference to currency easing, opting instead to tell politicians about the importance of financial regulation and free trade. He is well aware that the eurozone, in particular, needs a more robust US dollar to ensure continuity of economic growth.
Growth is edging up in Europe, but, as with Ireland, much of it depends on exports to the US — a big reason why the eurozone is nervous about a falling dollar. Domestic consumption has picked up in Asia and will in time lead to higher imports from the US and Europe. But the Trump administration needs to rein in its anti-China rhetoric.
John Whelan is an independent consultant specialising in international trade
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