“Trump could cause nervous US dollar exchange rate”

“An important lesson from the Brexit referendum is that entrepreneurs also have to bear in mind less likely scenarios. That lesson cannot be forgotten in the run-up to the American election,” says Joost Derks of the Dutch Payment and Exchange Company in the following column:

At the Fruit Attraction in Madrid earlier this month, I was often asked by customers about the price fluctuation of the British pound since Brexit. The news that Prime Minister, Theresa May, will trigger article 50 at the latest at the end of the first quarter of 2017, only made the pound even weaker. Uncertainty has a negative effect on the value of a currency. There is therefore a chance that I will receive similar questions about the fluctuations of the American dollar in a month.

On 8 November, the Americans will vote for their new president. Many polls indicate that Hillary Clinton has a significant lead by now. Because of Donald Trump’s strange statements, and the way he and his running mate Mike Pence sometimes abandon each other, the race might already seem like a done deal. But events surrounding Brexit have already made painfully clear that things do not always go as expected.

Cover currency risk

Entrepreneurs who trade internationally and pay and receive in American dollars would be wise to cover the risk that they will be unpleasantly surprised on 8 November. When, on Friday 24 June, signals came in very early in the morning, that the Leave camp would win the Brexit referendum, the pound immediately dropped significantly. If you wait until the last moment, you run the risk of missing out. Furthermore, the volatility of the pound steadily increased during the weeks before the referendum. The same thing will happen to the dollar. As price fluctuations of a currency increase, the price of protecting against that volatility will also increase.

An entrepreneur who exports his products to the US and receives dollars, could choose to buy a currency option. A similar option gives him the right to exchange his dollars for euros before a certain time at a predetermined rate. He will not therefore be affected by a sharp drop of the dollar, in the short term, in the event of a Trump victory. If the dollar increases after Hillary’s victory, the entrepreneur will profit, for an option gives him the right — and it's not an obligation — to exchange currencies.

Difficult choice in the long term

Using instruments such as a currency option, entrepreneurs can protect the value of their income in dollars for the coming months. If the dollar does drop after the election, entrepreneurs will be faced with a difficult choice: hold on to the current price in euros, so that sales prices are relatively expensive compared with dollar competitors, or join the decline of the dollar by also postponing the downwards selling price. If the unlikely scenario happens again, and Trump wins the election on 8 November, a currency option could give entrepreneurs time to calculate all of their possibilities.

For more information:
Nederlandsche Betaal & Wisselmaatschappij
Beursplein 5
1012 JW Amsterdam

The Netherlands
Tel: +31 20 5782439
Mob: +31 6 51755126
joost@nbwm.nl
www.nbwm.nl

Joost Derks is a currency expert with the Dutch Payment and Exchange Company (NBWM). He started his career with Van Lanschot Bankiers, and by now he has more than twenty years of experience in the world of currency. This column reflects his personal opinion. This information is not intended to constitute professional investment advice nor is it meant as a recommendation to make certain transactions or investments through the Dutch Payment and Exchange Company plc.