Taking Advantage Of A Weak U.S. Dollar

Why Geography Matters

Understanding the accounting treatment for foreign subsidiaries is the first step to determining how to take advantage of currency movements. The next step is capturing the arbitrage between where goods are sold and where goods are made. As the U.S. has moved toward becoming a service economy and away from a manufacturing economy, low-cost provider countries have captured those manufacturing dollars. U.S. companies took this to heart and started outsourcing much of their manufacturing and even some service jobs to low-cost provider countries to exploit those cheaper costs and improve margins. During times of U.S. dollar strength, low-cost provider countries produce goods cheaply; companies sell these goods at higher prices to consumers abroad to make a sufficient margin.

This works well when the U.S. dollar is strong; however, as the U.S. dollar falls, keeping costs in U.S. dollars and receiving revenues in stronger currencies - in other words, becoming an exporter - is more beneficial to a U.S. company.
Between 2005 and 2008, U.S. companies took advantage of the depreciating U.S. dollar as U.S. exports showed strong growth that occurred as a result of the shrinking of the U.S. current account deficit to an 8-year low of 2.4% of gross domestic product (GDP) (excluding oil) during 2008.

However, just to complicate matters slightly, many of the low-cost provider countries produce goods that areunaffected by U.S. dollar movements because these countries "peg" their currencies to the dollar.

In other words, they let their currencies fluctuate in tandem with the fluctuations of the U.S. dollar, preserving the relationship between the two. Regardless of whether goods are produced in the U.S. or by a country that links
its currency to the U.S., in a falling U.S. dollar environment, costs decline.

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