“Entrepreneurs should anticipate strength of the dollar”

The big surprises of 2016, such as the Brexit news and Donald Trump’s victory, will also be felt in 2017. Next year, the dollar will continue improving, while the euro will continue decreasing. Many companies which do international business have noticed the Brexit and Trump’s victory in their cashflow. Since the end of last year the British pound decreased by more than 12 per cent, while the American dollar increased by almost three per cent. These are good indicators of what we can expect in 2017.

In January, Trump will become president of the US. He is planning, among other things, on decreasing taxes and increasing the investments in infrastructure. That will lead to a recovering economic growth, and an increasing budget deficit. This causes a rise in interest in the US, making it more attractive to keep capital in the American currency.

Next year, Europe will negotiate with the UK about leaving the EU. Every member country has to approve or reject a proposal. That will result in additional negotiation rounds, and each time the adjusted proposal will have to be approved or rejected. This will undoubtedly lead to new problems and tensions, not just for negotiators, but also for the members of parliaments and the citizens of various member countries. That will further undermine the position of the euro.

The strength of the dollar has come at a moment of weakness for the euro. The dissatisfaction of a majority of the population promises to be a major theme for the elections in the Netherlands, France and Germany. A victory or gain in seats for populist parties will lead to a new round of speculations about the dissolution of the European Union. The uncertainty that this would bring with it leads to renewed pressure on the communal currency, as was seen earlier this year in the aftermath of the Brexit referendum.

And then there is Italy. The population of the country pulled the emergency brakes there as well, by rejecting Renzi’s constitutional reforms of the government. By now, Renzi has resigned, and Paolo Gentiloni is the new Prime Minister. It is completely unclear what will happen next in Italy. Should elections be next for that country as well, more than half the population in the Eurozone will vote. These countries combined are good for more than 70 per cent of GDP within the EU.

The prospect of a strong dollar and a weak euro means entrepreneurs have to consider how best to deal with payments in the American currency. Companies that are paid in dollars have the luxury of being anticipatory. If the dollar increases in value, these entrepreneurs will see their income in euros increasing. 

Entrepreneurs that import from dollar countries, on the other hand, are risking a rise in their costs. For example, a fruit trader that imports watermelons from Panama – which coupled its balboa to the dollar – will be faced with the difficult choice of calculating increasing costs to their customers, or accept lower profit margins. A currency option could help avoid a similar situation. This tool allows buyers the right to exchange euros against dollars at a price previously determined. The advance of the dollar, however, will not be infinite. Almost half the traders have already chosen parity, which means the dollar is worth the same as the euro. But it is exactly the high consensus that poses a risk. As soon as that level has been reached, many traders will take profits from their position. They then sell dollars, resulting in a decrease in the value of that currency. That could weaken the dollar significantly in a short amount of time.