Two years ago, CFO published a cover story
about the decline of the dollar, in which several sources speculated that the U.S. currency's dominance was coming to an end. Some observers suggested that the then-strengthening euro might eventually take the dollar's place as the world's reserve currency, while others thought that perhaps a blend or basket of currencies would play the role instead. There was a general sense that the dollar was on its way down, if not entirely out.
Now, it's hard to know what to think. Currency markets have become more volatile, as highlighted by recent headlines on succeeding days in the Wall Street Journal: "Euro Gains in Field Day against Dollar," followed by "Dollar Gains in Broad Rally." The dollar is bouncing around like a ping-pong ball, while the euro, far from replacing the greenback as the global standard, could be on the verge of breaking up, as debt-crippled Greece threatens to bring down the European Union's 11-year-old common monetary unit.
"It's so difficult to have a currency union without a political union," says Campbell Harvey, a professor of international business at Duke University's Fuqua School of Business, adding that if the EU does bail out Greece, it may create a moral-hazard issue. What will the EU do if Spain, Portugal, or Ireland faces a crisis next?
Meanwhile, the volatility makes currency risk management extremely challenging. In CFO's quarterly Global Business Outlook survey, in which we team up with Duke to poll hundreds of finance executives, currency risk rarely ranks as a top concern. Yet for those with significant international operations, sourcing, or sales, now would seem to be the time to at least consider an approach to hedging that risk. Modeling the impact of such extreme scenarios as a breakup of the euro would be one place to start, says Harvey. |
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