A Back-Breaking Greenback?

A Back-Breaking Greenback? | Risk & Insurance | It is a beautiful sunny afternoon in early March in San Diego as I write this column. The world's economic predicament seems to change daily, so I feel obligated to mark the date when I write.

By Joanna Makomaski

Today the US dollar is $1.29 Canadian.The soft drink that I just ordered was $2.50 US which converts to about $3.22 dollars Canadian.Last summer, this same drink was $2.40 Canadian. It makes me dizzy thinking about it.I am Canadian and we Canadians watch two things religiously: one, the weather and two, the US exchange rate.Every vacation down south and every cross-border shopping trip is inspired by both.

In truth, I have never really attempted to untangle the mystery behind foreign currency fluctuations until very recently.More intriguing has been US Treasury Secretary Tim Geithner's speech disclosing the Fed's plan on the 'TARP2' bailout plan.The numbers he projected were absolutely staggering.

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Where are we getting all this money and what are the consequences of printing this much of it?Intuitively, wouldn't this dilute the dollar's value?

It seems not. Conversely, we see everyone feverishly buying billions of USD T-bills even at 0 percent financing, and the US dollar still remains strong.It is an interesting paradox that causes me to pause.Has the world become inexplicably generous? Amazingly, despite all the economic turbulence, the dollar is still being viewed as a risk-free safe haven. This is great news, right?

Well, I am a risk manager and at times my dark side comes out to play the game of "What if?"Some basic rules-of-thumb to consider.Rule 1: The stronger U.S. dollar can create a big trade deficit.Rule 2: When the stock market goes down, the dollar tends to go up.Rule 3: Tsunami waves of money flowing out of emerging markets and developing nations can be perilous, especially when they are desperately seeking to refinance their own debt. Rule 4:Being trillions in debt is not always good.

THE LOSS OF FAITH

Now let's ask ourselves this: what if big buyers of US treasuries suddenly lose faith in the US, the dollar suddenly devalues and the Fed needs to raise interest rates? My goodness--inflation is the last thing we need when we are barely getting by right now!Could this be the next wave of the financial crisis? Are we running the risk of history repeating itself?After all, Roosevelt did drag the US out of the "first" great depression by devaluing the dollar by 40 percent against gold.

Exhale everyone. The comforting news is the US dollar is and likely will remain the medium of exchange.More than 50 percent of world trade is still done in US currency.Better news is that there is no practical alternative to the greenback today.The dollar will lose some of its luster eventually but let's hope that it does so very slowly.Then, we are likely going to be ok.

That being said, it still doesn't hurt to keep a cautionary eye on this issue and try to currency-proof your business.Time to dust-off your currency risk management plans, if you haven't done so already, and conduct a keen review of those hedging instruments like your Forward Exchange Contracts, Money Market Hedge, Futures, Options and Swaps. Let's not get blind-sided by a back-breaking greenback.

JOANNA MAKOMASKI, the former risk manager for an energy delivery company, is a specialist in innovative enterprise risk management methods and implementation techniques with V3 Advisory Group.

April 15, 2009

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