02-25-2025
The global economic landscape is undergoing a seismic shift. One month after the inauguration of the 47th President of the United States of America, business leaders aren't celebrating as some predicted. The expectation of deregulation and corporate tax cuts has been overshadowed by the uncertainty of trade policy. New tariff policy proposals threaten to disrupt decades of relative openness in U.S. trade while increasing foreign exchange rate volatility.
As a safe haven asset, the U.S. dollar has often benefited during periods of trade policy uncertainty. However, the relation between trade policy and exchange rates is becoming much more complex. As a result, multinational corporations will be pressed to develop more sophisticated currency risk management practices.
Some of the largest companies are already experiencing this pressure. Amazon currently expects an “unusually large” $2.1 billion loss due to unfavorable currency fluctuations. McDonald's and Coca-Cola have warned investors about similar negative effects on their respective earnings. For businesses with global operations, there is no time to waste. The time to prioritize effective currency risk management is now.
The financial impact of exchange rate movements varies with a company’s international business model. American exporters that receive payments in foreign currencies face a challenge that is twofold. First, a stronger dollar reduces the value of their foreign earnings. Second, trade tensions drive investors to demand greater risk premiums for holding foreign currencies, particularly those of emerging markets heavily reliant on U.S. trade, further eroding the value of repatriated earnings.
For American importers, the situation is more nuanced. Although they experience greater costs from tariffs, a stronger dollar has historically cushioned the negative impact during periods of uncertainty. However, recent market trends indicate that investors are increasingly seeking alternative safe haven assets like gold, rather than automatically flocking to U.S. dollars. This shift suggests importers cannot always rely on dollar strength to offset tariff costs. They must prepare for the possibility of both higher import costs and unfavorable exchange rates.
In developing sophisticated risk management strategies, a flexible approach is essential. Companies must be prepared for multiple scenarios. Their success will depend on adaptable hedging strategies, diversified sourcing and pricing flexibility. Companies that proactively address these challenges will be better positioned to navigate an increasingly uncertain global trade landscape.
Craig Brown is an assistant professor of finance at Purdue’s Mitch Daniels School of Business. His fields of expertise are financial economics, applied microeconometrics, international finance and political economy. His current research interests include the regulation of financial intermediaries, government financial management, leadership and asset risk in international finance.
