Businesses trading with the States could foot bill equivalent to VAT
18 April 2007
Yesterday’s announcement that the US dollar had reached an exchange rate of two dollars to the pound saw FX trading hit a long speculated ‘milestone level’ and was welcomed by UK businesses who import goods and services in US dollars.
However, hitting this peak highlights the volatility of the once stable ‘buck’ and should be taken as a warning cautions currency specialists HiFX. The FX experts point out that yesterday’s peak marks a 17.5% fluctuation in the dollar rate since early 2006, therefore businesses without a currency strategy are at risk of losing margin equivalent to VAT levels.
Chris Towner, Director of HiFX Advisory Services, comments “With a $2 pound hitting the headlines, this simply gives the market a release from all the pent up speculation that began back in 2004. It was in 2004 that the speculation of the ‘two dollar pound’ started when the GBP/USD raced up to $1.95. However, since then we have been down to $1.70 in 2005 and now find ourselves at $2.00. That equates to a 17.5% currency fluctuation in approximately 12 months.
“UK businesses do not ignore a 17.5% VAT bill but without identifying their FX exposures and properly managing them this is exactly the risk that businesses are taking.”
“Approximately 80% of our clients have FX exposure to the dollar and this is representative of the UK economy. Yesterday’s peak signals a massive issue for UK businesses that could be facing huge losses in the wake of yesterday’s soaring dollar”
At $2, the pound is currently about 20% above its 20-year average of $1.65; however, the real concern for businesses trading in dollars should be ‘how long will it last?’ and ‘will it fall further?’. For those buying dollars, deciding how much to buy and when may be a question of greed and capitalising on the falling dollar, however for those selling, the trading decision is based more on the fear of limiting losses.
World trade grew by approximately 8% in the 2006 signalling an ever increasing FX exposure for businesses of all sizes. Towner warns, “The greed versus fear factors that influence the decisions of companies buying and selling dollars respectively could be prepared for and mitigated against with an effective currency risk management strategy”
