Fed vs ECB: how can businesses manage conflicting monetary policies?

“A consensus is growing that escaping this low-growth, low-inflation environment will require a re-balancing between monetary, fiscal and structural policies.” These very wise words came from Bank of England (BoE) governor Mark Carney, in a speech last September. The challenge is that since Carney uttered these words, a highly divided global political climate has led to different regions and countries creating diverging monetary policies in an attempt to stimulate growth.

Nowhere is this divergence more evident than across the US and Europe. This month, the US Federal Reserve implemented its second rate rise in three months. By contrast, the European Central Bank (ECB) has been full steam ahead with its quantitative easing (QE) bond buying binge. The net effect has been a continuing weakening of the euro against an increasingly stronger dollar. On top of this, president Trump’s infrastructure spending drive, coupled with the likelihood of more US rate hikes down the road from the Fed, should further strengthen the dollar against the euro in the near term.

Seizing the opportunity

For US firms with operations across Europe, this situation presents numerous challenges as well as opportunities. With a strong dollar, as long as demand remains high, imports are likely to be cheaper. On the flip side, if the imports start to undercut pricing, then firms will subsequently lose business. As a result, there will be a much bigger onus on chief financial officers (CFOs) to monitor for currency movements on an almost daily basis.

Currently, any US company with operations in Europe experiencing a high demand for its products will be getting less out of their overseas sales – while any CFO working for a firm in this situation could be faced with having to recalibrate their earnings forecast.

All of this points to the fact that CFOs and financial directors need to be much more up to speed with geopolitical events, particularly as a central bank’s monetary policy decision making could alter at any stage. The rise of right wing populist movements across France and Germany could very well threaten the existence of the eurozone.

Should any of these parties come to power, the ECB may well take further action – similar to the measures enforced by the BoE post-Brexit. In the event this scenario materialised, businesses would need to adjust accordingly. However, until then for any prominent US exporter operating in Europe, the euro’s weak stance against the dollar is an opportunity to grasp with both hands. CFOs that take it up now, while keeping a keen eye on the near future, will be best positioned to avoid any – as Mark Carney puts it – further “economic post-traumatic stress disorder.”

 

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