Conspiracy theories abound about the so-called demise of the dollar. When all is said and done, however, the dollar no doubt will remain widely held by central banks and citizens of the world, and currency values will continue to do what they always have done since the onset of floating exchange rates: They will fluctuate.
The foreign exchange market, the world’s largest financial market, experienced some very big fluctuations in exchange rates following Lehman Brothers’ bankruptcy in September 2008. While the FX market has settled down considerably since then, the dollar is being punished for no longer being needed as a safe haven.
While reports of the dollar’s death are exaggerated, it is necessary for corporate finance officials to learn to live with currency exposure. Once the Federal Reserve begins raising interest rates, the dollar could rebound quickly. The sometimes sudden and often unpredictable moves in the value of the dollar, the euro and the yen, as well as a host of major emerging market currencies, can create a minefield for globally active companies and investors.
Accurately measuring and understanding currency risk is essential for managing it properly. Not every position needs to be hedged, particularly if a CFO has a strongly held view on the market. In this supplement, Global Finance examines the tendency of the FX market to be subject to Murphy’s Law: What can go wrong will go wrong, and at the worst possible time. There are ways, however, to avoid or limit the pain of guessing incorrectly.
We also take a look at FX swaps, the most popular form of trading currencies. The use of swap markets by international banks to overcome a dollar-funding shortage at the height of the financial crisis caused deviations in benchmark interest rates that impaired global liquidity. Now these instruments are receiving special treatment as legislators draw up new laws for avoiding future crises.
Meanwhile, retail FX trading is continuing to expand rapidly. Spread betting, similar to betting on sporting events, has become popular in the United Kingdom and parts of Europe. One key attraction is that spread-betting gains are not taxed as capital gains.
Finally, as the FX markets continue to evolve, Global Finance profiles some of the most important people in the industry in a “Who’s Who” of foreign exchange.
With the dollar printing presses working overtime and US deficit spending the order of the day, it is little wonder that some market participants worry that the supply of greenbacks will overwhelm demand. So far, however, the dollar’s day of reckoning has not arrived.