How Exchange Rates Affect Global Sourcing?

Date: April 10, 2015

How Exchange Rates Affect Global Sourcing?

Buyers Must Adapt Quickly to the Change of Currency Value

Since late last year, the Euro has been decreasing at a steady but significant rate. Currently down 16% from just six months ago, the European Central Bank declared purchases of 60 billion euro per month in bonds in an attempt to alleviate the economic situation. In light of this sensitive monetary situation, many markets around the world are being affected. The art market, for example, is seeing a significant decrease in European buyers. With the strengthening dollar, the opportunity is presented for cash-heavy Americans to scoop up prized works of art. The world of global sourcing, however, has a different fate. Intimately woven together through trade agreements, the question of how the Euro affects sourcing markets, particularly India’s, is delicate and far-reaching.

With Europe the runner-up of India’s major trading partners, the decline in the Euro has created ripples for both European and Indian companies alike. As the Indian rupee builds strength against the Euro, European buyers could suffer losses of up to 12% in exchange rates by 2016. Economists report that stock holders might see a depreciation of value as high as 15%. Many Indian companies have made profits in rupees. They will ask European buyers to continue to pay for products in rupees - now at a higher price due to the falling Euro. European buyers may have to consider other low cost sourcing destination options.

However, European buyers may come out without too much damage in this situation if their Indian suppliers have their operating income in Euro. In this case, the Indian companies will suffer as they will be paid less to do the same amount of work.

Certainly one thing that can be counted on is that as the Euro continues to fall, the U.S. dollar will continue to climb. Rather than being excited by the prospect of having a stronger currency, U.S. financial experts are worried about the how the high dollar will play out in the world of international exports. As the dollar increases in value, exports abroad will too increase in price, although Federal officials should not worry too much about the impact of expensive exports on the country’s GDP as it only makes up 13% of the country’s income. However, if you as a supplier would like to sell your products overseas, you should still be careful of the dollar appreciation because it may affect your export revenues. Cost control should be your first priority.

In order to reduce the impact of exchange rates, buyers have to develop a contingency plan  for global sourcing, for example, consider other sourcing locations or negotiate with suppliers for better quality products. You should always have a Plan B when doing international business. Otherwise, you may suffer from unexpected economic shocks.

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