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In for a Penny, In for a Yen or a Euro

How to balance the risks of a declining dollar.
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As the Panama Canal continues its expansion, financing for the project will likely come in multiple currencies to balance the risk of currency fluctuations. Global entrepreneurs can do the same thing, albeit on a smaller scale.

It's about balancing risks, notes Tom O'Brien, a financial analyst and author of Timing the Trade. Global entrepreneurs can minimize currency-related risks in a couple of ways. Obtaining loans for foreign expansions in local currency can improve purchasing power when the dollar slumps and can cost less to pay off when the dollar rebounds. But "it can be devastating if the dollar implodes," O'Brien warns. He advises considering foreign loans for only about 30 percent of guaranteed orders--and only if those contracts are in hand.

A better option, O'Brien says, is buying components in U.S. dollars and pricing finished products in local currencies. It's not as risky as a loan and it helps modulate currency fluctuation risks.

"Players in this arena are very vulnerable when trends change or reverse," stresses Bob Enright, co-founder and partner at the Burton/Enright Group, a private wealth-management firm. "The winds change instantly and unpredictably for foreign currencies, [which are] sensitive to a seemingly limitless number of factors."

The bottom line: Don't try to make money on currency fluctuations; instead, use currencies to balance your risks.

Edition: May 2017

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