Currency Flows and Translations

April 2011
Ivan Obolensky

Where and when to best concentrate one’s business efforts depends not only on what one’s company produces but also on the global business climate that exists at the time. One of the least known areas that influence business is the ebb and flow of funds between countries and the resulting exchange rates.

On the surface it would seem fairly simple: when sociopolitical conditions are favorable money is attracted into a particular country. Under conditions of turmoil money is repelled and the value of its currency goes down in relation to others.

Where people throw up their hands in exasperation is when the exact opposite occurs. At that point, there seems no point in risking one’s business in a country whose currency valuations defy logic. The solution may seem to drop that country and the subject of global trade completely from the business strategy.

A good example of a country whose currency flows have moved in an anomalous direction is Japan. Economic, political, and natural turmoil are at a high, yet the Yen has grown stronger in relation to other currencies. How is this? In this instance, Japan has had such low interest rates that a large portion of its wealth is held overseas in order to gain more return but with hard times at home, it was repatriated to help handle the immediate situation and hence the flow of capital into Japan was greater than the amount moving out of Japan. The Yen strengthened. A few weeks later, it reversed as the long-term magnitude of the recent calamity became more apparent and foreign investors cut their holdings.

In another instance, the US stock market has been going up strongly, and yet the dollar has been weakening in relation to the Euro. In this case, if the US market increases 30% and the European markets improve only 15%, it would seem to make more sense to invest in the United States, at least until one looks at the Euro/dollar relationship and sees that the Euro is up 20%. Why would that make a difference?

If the United States is up 30% but down 20% in relation to the Euro, the United States is actually up only 10% when looked at from the viewpoint of a European investor. The 15% made in the European markets is better than the 10% returned in the United States once the currency exchange of dollars back to Euros is taken into account.

In the example above, money is performing better in the European markets on a relative basis than in the United States.

Taken from a US perspective, it might be worth the switch simply because one will realize a currency advantage of 20% when the funds return to the United States, provided the declining dollar continues, making the European investment yield 35%, or 5% better than the 30% return if the funds were invested strictly in the US markets.

Currencies rise and fall in relation to each other often by large amounts. Moves of 50% in a year are not uncommon and which currency is the strongest has changed many times. In the ’80s the dollar was extremely strong compared to the British Pound and the Yen. With the Federal Reserve handling inflation through interest rate increases, it became extremely advantageous to invest in the United States even if only in the short term as there was an interest rate advantage and the dollar became the world’s strongest currency.

In the present, the dollar has been decreasing in relation to the world’s currencies as it is considered that the US economy requires the continued Federal Reserve policy of economic stimulus and sustained low interest rates to prevent the onset of a deeper and prolonged recession. The dollar has been shunned as a result, but that may not always be the case. As economic numbers improve, the dollar could reverse as a shift in Fed policy becomes more and more likely.

From this a couple of rules can be formulated and observed:

Capital moves to avoid danger globally.

Capital moves globally for comparative advantage in currency.¹

Why a Devalued Dollar can Attract Foreign Clients

By observing trends between the US dollar and, for instance, various Latin American currencies one can gain an advantage by promoting in the right place and increasing one’s chance of success.

When the dollar declines in relation to another country’s currency and one is located in the United States, it is worth noting that your services are becoming more and more affordable to those in other countries. It would be worth promoting oneself in the foreign country and take advantage of the relative bargain you and your company represent. As the dollar declines your services are being offered at a steeper and steeper discount. Having your marketing materials translated into the language of the target country and promoting abroad makes sense. Your goods and services here in the United States are on sale only it may not be known in the area where it would be the most affordable. On the other hand companies abroad who have not been able to do business in the United States can now afford to do so. Do they know you exist or are you only known in the United States?

Well-translated materials can feed international exposure and increase sales where one might have an unknown relative and comparative advantage.

Why a Devalued Foreign Currency is Attractive to US Companies

When the dollar increases, the dollar buys more abroad. US companies that buy abroad are at an advantage because their dollars are worth more and more. Again foreign exposure can give one a competitive advantage as goods cost less outside the United States. Being able to locate those goods, write the contracts, and create relationships all require accurate language translation for smooth business dealings. As a result of this competitive advantage and resulting lower expenditures, foreign countries are eager to invest in the United States when the dollar is rising as there is a comparative advantage to doing so even when compared with investing in resources locally.

By observing the trend of the dollar in relation to the rest of the world’s currencies, one can more accurately assess where to put one’s attention: inside the United States, or outside. In either case, good translations can attract foreign capital when the dollar is up trending and can help promote your goods and services abroad when the dollar declines. How currencies move is often the most important but least understood variable as to the relative and comparative advantage of concentrating one’s business strategy at home or abroad.

¹ Armstrong, M. A. (2008, November 26). The New Practical “Laws” of Global Economics. Retrieved April 13, 2011, from Armstrong Economics: Forecasting the World: http://armstrongeconomics.files.wordpress.com/2009/04/martin-armstrong-new-practical-laws-of-economics-112608.pdf

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