The US Dollar is considered by many economists to be a safe haven currency, meaning that the odds of the US Dollar losing an extreme and unexpected amount of its value are low. Because of this, many international companies choose to invoice their customers in USD, regardless of whether or not their own country’s currency is USD.
For smaller companies without large financial departments, invoicing customers in USD can become its own currency strategy. With all of the options available to companies looking to enhance their strategies against currency exposure, is focusing only on USD worth the limitations?
Why USD?
The United States Dollar is one of the most commonly held reserve currencies. USD is backed by the Federal Reserve. Foreign governments and institutions also hold significant quantities of the US dollar, thus making it a safe haven currency. As long as multiple countries have significant amounts of USD and USD is backed by the Federal Reserve, the currency will always be desired, and therefore will not depreciate to an extreme degree. Commodities such as oil, gold and petroleum are also handled in USD, further contributing to its place as a stable currency.
Because USD is a safe haven currency, many companies outside of the US choose to invoice in USD to protect themselves from currency exposure. The thought behind this strategy is that a safe haven currency does not carry the risk of extreme volatility, the way other less stable currencies might. This makes it easier for companies to predict profits and potential loss, as they can more easily assume the value of the USD will be stable.
The US Dollar is considered by many economists to be a safe haven currency, meaning that the odds of the US Dollar losing an extreme and unexpected amount of its value are low. Because of this, many international companies choose to invoice their customers in USD, regardless of whether or not their own country’s currency is USD.
For smaller companies without large financial departments, invoicing customers in USD can become its own currency strategy. With all of the options available to companies looking to enhance their strategies against currency exposure, is focusing only on USD worth the limitations?
Why USD?
The United States Dollar is one of the most commonly held reserve currencies. USD is backed by the Federal Reserve. Foreign governments and institutions also hold significant quantities of the US dollar, thus making it a safe haven currency. As long as multiple countries have significant amounts of USD and USD is backed by the Federal Reserve, the currency will always be desired, and therefore will not depreciate to an extreme degree. Commodities such as oil, gold and petroleum are also handled in USD, further contributing to its place as a stable currency.
Because USD is a safe haven currency, many companies outside of the US choose to invoice in USD to protect themselves from currency exposure. The thought behind this strategy is that a safe haven currency does not carry the risk of extreme volatility, the way other less stable currencies might. This makes it easier for companies to predict profits and potential loss, as they can more easily assume the value of the USD will be stable.
The Downside to Solely Billing in USD
But is a “USD only” strategy the best option to mitigate currency risk for businesses? A company that chooses USD as its sole currency effectively shifts all currency risk to potential customers. Because of this, international businesses dealing solely in USD may lose a customer base that uses other currencies. Customers or clients that would prefer to use their own home currency are more likely do business with a company that accepts their preferred currency. Additionally, though USD is a safe haven currency, it is still subject to volatility, and like all currencies, its value fluctuates every minute of every day. For companies billing in USD, should they exchange US dollars for their home currency, they will still be subject to currency volatility. To avoid the risk involved with currency exposure, companies should consider alternatives to a USD only currency strategy, such as currency forwards or currency futures. Companies can learn more about various options for mitigating currency risk by engaging with a currency specialist. Compare specialists here.
