Economy

How to Protect Yourself When the Dollar Takes a Dip

Exporters are especially vulnerable to currency fluctuations. But there are steps you can take to turn the financial roller coaster into a smooth ride

Written by Julie Baldassi

A fluctuating dollar will inevitably impact any business that exports. This year, the Canadian dollar dipped to around 95 cents on the American dollar—a decline of approximately 6%—and analysts anticipate that this exchange rate will hold for the balance of 2013, a situation that could benefit export-based SMEs.

As exporters know, when the Canadian dollar declines in value, Canadian exports are more competitive in the U.S. and other markets that import from us, says David Watt, HSBC Canada’s chief economist.

However, Watt adds, exporters can be impacted in varying ways. In some cases, they may face increased costs depending on whether supplies are imported, and how those supplies are paid for.

“If [SMEs] have significant imports that are being purchased with the Canadian dollar, things are going to be a bit more expensive. It may cause them to squeeze their margin in the export market,” says Watt.

Watt says SMEs can employ a number of strategies to lock in to a fixed currency price over a long period, eliminating risk, but also opportunity, when the dollar increases in value. Although paying for imports in Canadian funds “does give you the possibility that you give up some gain in some cases, it also protects you [from the impact of fluctuations],” says Watt.

Watt points to other ways in which SMEs can use the low Canadian dollar to their advantage. Watt says that for businesses that rely on Canadian, rather than foreign, labour “it will provide an advantage because Canadian labour will become so much cheaper.”

Watt also recommends that SMEs consider expanding into new global markets to mitigate the impacts of a fluctuating dollar.

“If you’re talking about the Canadian dollar, more often than not you’re comparing it to the U.S. dollar, and historically, that’s been the right way to do it because so much of our trade has been with the US. The other way to get around that is to have either a more diverse import base or more diverse export base,” says Watt.

Although many SMEs don’t usually think about foreign investments, Watt says that doing so may create a “natural hedge.”

At HSBC Canada, Watt says he has been advising clients to look farther afield for global investments, particularly Asia. “So many global business opportunities are going to be driven by the emerging Asian markets,” says Watt. “It makes sense to consider which operations can be integrated.”

Related: U.S. Export Gamble and Trading Places: The Evolving Landscape of Global Trade

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Originally appeared on PROFITguide.com