2 - Fluctuating exchange rates mean we have to protect ourselves

Posted on 12 Jul 2007 at 11:09

Verdict: <strong>False</strong>

"Fluctuation in exchange rates? Not a justifiable reason," says Professor John Fender, macroeconomist at the University of Birmingham. "US companies sell much of their software around the world in dollars, and have hedge funds in euros and Yen to cover other markets too."

"Exchange rates are something companies hide behind and they blur the picture, mainly because most people don't understand them," agrees Loughborough's Professor Pentecost. "In trading, Microsoft would have a best-case and worst-case scenario, but it's unlikely to leave itself exposed."

A company of Microsoft's size will have a team of accountants and traders guarding against negative exposure, yet the simplest way a large company can avoid getting burnt in the markets is to trade in its home currency. "In many cases, big companies also insist on doing business in dollars, so the exchange rate becomes irrelevant, as it's the reseller that's bearing the risk of exchange-rate fluctuations, not the manufacturer," says Pentecost.

Certainly, large resellers, such as the Enta Group, pay in dollars when they buy from Microsoft, a position that means they're constantly forced to monitor their prices. "All our Microsoft stuff we buy in dollars, so we change our prices almost daily," says Jenner. "Software companies charge in as few currencies as possible and, in many cases, everyone has to buy in dollars because it makes life much easier; otherwise, they'd have to trade in virtually every global currency."

So the exchange-rate situation looks like a red herring. This would be galling enough, but, in many cases, manufacturers actually turn it to their advantage. Companies can and do make money from the hedging tactics they use to protect themselves from currency fluctuations. Last year, while charging Europeans extra to cover currency risks, Adobe made a rather tasty $5 million from its foreign currency dealings, according to its own financial accounts. And the company isn't alone.

However, it's worth noting that the price differential is inflated at the moment, because the dollar remains weaker than a happy-hour gin and tonic. "Having set the UK prices as these products went to market, there'll be some real price changes in comparison, depending on the dollar," says Fender. "At the moment, the higher exchange rate exaggerates or emphasises the difference."

Back to 'Rip-off Britain: excuses exposed'.

Author: Stewart Mitchell