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Strategies for Managing a Depreciating Euro

  • By Craig Martin
  • Published: 12/11/2014

As the dollar strengthens against the euro and emerging market currencies, both European and U.S. companies are feeling the pinch, as foreign revenues translate into lower earnings in their functional currencies. With the U.S. economy destined to continue to outperform its peers, a slowdown in large markets like India, Brazil and China and potential for deflation in Europe, there’s only more trouble to come, particularly for US companies that derive much of their revenues from outside the US.

The depreciation of the EUR against the USD by about 12 percent since May 2014 has once again led corporate treasurers to focus their attention on their FX risk management activities and the performance of their hedging programs. Already, U.S.-based companies are reporting that the move in FX is adversely affecting earnings as euro revenue translates into lower dollar results. Conversely, depending on their hedging approach, Euro-functional companies are benefitting as the dollar rises. CFOs are asking treasurers what impact the euro’s depreciation has on the organization’s bottom line.

Both dollar functional and euro functional entities are affected, although the impact is different for each one. An article by Laurens Tijdhof and Tobias Westermaier at Zanders highlights the different kind of exposures treasury faces and how best to hedge each one.

“Increasingly, companies are using a layered hedge approach whereby they add layers of hedges each quarter as exposures become clearer,” they write. “Companies can achieve the best result using a ‘layered’ hedge strategy because the effective hedge rate achieved for each quarter consists of an average of four different rates from four different points in time, which leads to a less volatile outcome.” To read the entire article click here.

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