Looking for a Sale Overseas?
Submitted by Michael Radkay,
As an investor and consumer in today’s global economy, studying prices and consumer behavior has helped me in many practical ways. Understanding the value of the U.S. Dollar with respect to currency prices of various other countries has become extremely relevant to our everyday lives and conducting our businesses. In our last issue we wrote about having an understanding of interest rates and applying it to buying a home or refinancing your mortgage. We can also apply our interest rates knowledge to get a feel for the strength or weakness of global economies as well. Look to the Libor for a feel for London interest rates (equivalent to our U.S. Federal Funds Rate) and the Euribor for European interest rates.
But let’s face it, we don’t buy a home or refinance our mortgages everyday. One thing we always do, however, is spend money, whether it is for groceries, living expenses and businesses or even, for fun and recreation. By simply tracking price movement of global currency markets my understanding of the cost of products and its effects on the U.S. and overseas markets have grown exponentially. I have learned to take advantage of both up and down fluctuations in the U.S. Dollar against many of the major economies in the world, and you can as well.
Today many U.S. businesses are considering overseas trade. It is imperative that you know, as a business person, if conducting trade in a particular foreign country makes sense monetarily. For example, let’s assume you are thinking about doing business in London vs. Switzerland. Your main concerns might be how do I gauge the cost of doing my business and which country will I be more profitable. Of course you need to consider such factors as the strength of the country’s labor force and tax structures, but first you need to have an understanding of the exchange rate when you convert your U.S. Dollars to British Pounds or Swiss Francs. The value of the British Pound vs. the U.S. Dollar (GBP/USD) at its peak in November ’07 was more than 2 to 1 at 2.1000. Just recently in January ’09 the value hit as low as 1.3500 due to the global credit crisis that is now hitting overseas economies at an alarming pace. In December ’08 the value of the U.S. Dollar vs. the Swiss Franc (USD/CHF) was surprisingly near parity and today it has strengthened to 1.1800. While this looks like the British Pound is more enticing, it is actually the Swiss Franc that is a better, stronger conversion for our U.S. Dollar (look to the Feature Tip for explanation). Planning to conduct business in both London and Switzerland is becoming more attractive and looks to keep trending in this direction as the world seems to be viewing U.S. progress on fixing the global meltdown to be more on track than our European friends. Interest rates are trending lower across Europe and the U.S. rates look to be stabilizing and possibly edging slightly higher looking out three months from now. This pattern is strengthening the U.S. Dollar across Europe and creating lucrative opportunities for U.S. businesses overseas.
Thinking outside the box and learning more about the true value of the U.S. Dollar with respect to global currency will help you get a foothold on our ever- changing, fast paced world. This is where we really begin to understand what makes the prices of our favorite items rise and fall. Don’t become paralyzed when prices shift against you, learn to make your own, educated choices real-time.