Strong Dollar
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Your company operates in the MS Delta and imported inputs are used in the final product. The final product is then exported to the rest of the world. The Secretary of the Treasury, Tim Geithner, made the following statement to the Chinese students at Beijing State University some time ago in an attempt tame fears that the US is following an easy monetary policy which is leading to the US dollar losing its power against the currencies of its trading partners: The US is committed to a strong dollar policy! If you believe the Secretary, what is the impact of his stated policy on your business? Suppose you do not think that the statement does have any credibility. What is the expected impact of the resulting policy on your business? In both cases, under what circumstances, would your business may be better off?
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Solution Summary
The expert examines operating a company with a strong dollar. The impact of the resulting policy on your business is determined.
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Let us first understand the foreign exchange markets. Whether you are buying a Japanese car or a Chinese toy, the manufacturer is spending money in foreign currency and selling the products in domestic dollars. So when they get back their money in their home country, they sell dollars and buy their home currency. Similarly, when US companies such as Proctor and Gamble sell its products in foreign markets, they are spending money in dollars and getting paid in foreign currency. When they transfer this money back to US, they are selling the foreign currency and buying the US dollars.
In most of the countries in the world, the foreign currency markets are free from government regulations and the law of supply and demand determines currency exchange prices. This is true for the US economy also. In some developing and underdeveloped economies, the government sets the foreign exchange prices. Even in these countries the government periodically revise the prices to match the demand and supply situation.
In our company, we are dealing with foreign currency ...
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