With the US dollar taking a prolonged beating, the question arises: should we start pricing in foreign currencies?
The U.S. dollar has taken a beating lately. Since July, it has fallen significantly in value against the Yen, Euro, Pound, Canadian Dollar and Gold among other currencies and commodities. This downward trend may be accelerating, but it isn’t something new. Back in August 2000, a single U.S. dollar could be exchanged for 108 Yen, 1.1 Euros, 0.67 Pounds 1.47 Canadian Dollars or .0036 ounces of gold. How things have changed.
This decline in the value of the dollar causes important problems for U.S. companies at various levels.
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Change in the value of the U.S. Dollar |
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| Over the last: | ||||||
| Relative to: | Week | Month | 9 months | Year | 2 years | Ten years |
| Yen | 1% | -4% | -6% | -10% | -18% | -29% |
| Euros | 0% | 1% | -7% | -11% | -2% | -37% |
| Pound | 1% | -2% | -5% | -4% | 0% | -9% |
| Canadian dollar | 0% | 2% | -1% | -4% | -11% | -33% |
| Gold ounces | 1% | -19% | -24% | -33% | -48% | -85% |
For companies that buy from foreign suppliers, the cost of goods sold increases
Foreign suppliers that price in dollars are raising their dollar-denominated prices to compensate for the decline in the dollar relative to their local currency. Foreign suppliers that price in their local currency leave U.S. buyers fully exposed to fluctuations in the value of the dollar. For the foreseeable future, this makes foreign purchases more expensive as the value of the dollar trends downwards.
Given the current state of the economy, it’s very difficult for a U.S. company to raise prices. Therefore, companies that buy from foreign suppliers will have to absorb the losses due to currency fluctuations or run the risk of alienating customers through price increases during a quasi-recession. Neither option is attractive.
For companies that export and set price in dollars, money is being left on the table
By maintaining prices in dollars at a time when our currency is declining, companies are giving an automatic discount to their foreign buyers. Over the past year, for example, the dollar has declined 11 percent relative to the Euro. This means that a company selling a product for the equivalent of $880 could have generated $1,000 in revenue per unit by simply pricing in Euros.
Strategies for dealing with a declining dollar
One solution to these problems is to develop a pricing list in multiple currencies (for exporters) and to peg U.S. dollar prices to supplier currencies (for importers). To make this happen,
