1€ = 1$ for the first time in 20 years. How is this relevant for designers?
Today, 1 euro is worth exactly 1 US dollar. This is the lowest it has been in the last 20 years. Usually, 1 euro was hovering between 1.1 and 1.2 US dollars.
The fall of the euro against the US dollar is caused by a combination of factors. First of all, Russia's invasion of Ukraine may lead to an economic recession in Europe. So, organisations holding the euro currency start selling it for currency with a brighter outlook. And secondly, European Central Bank (aka ECB) has a much milder plan of increasing interest rates compared to the FED (the central bank of the US), which signals to investors that FED is more serious about fighting inflation than Europe.
But the US dollar did not get stronger only against the euro. The Dollar Index, which measures the US dollar's strength against other major world currencies, shows that the dollar is up more than 10% over the last year.
That is good for US companies, right? Well, it's complicated.
To untangle this topic, let's have a look at something called currency risk.
1. What is currency risk?
Imagine you are working for a car factory, manufacturing cars in the US. So, almost all your expenses are denominated in the US dollar. But you are selling your cars all around the world. So, to calculate a retail price for each market you convert your retail price from the US dollar to each market you are selling to (it's usually a bit more complicated but we can keep it simple for the sake of our argument).
Let's say that your average car price is $30,000. And since you are selling it in Europe, you convert dollars to euros. A few months back euro was worth 1.2 dollars so the price in euros would be €25,000. But now the euro has weakened against the US dollar so we need to raise our prices to €30,000, which makes our product less appealing to the European market.
That is an example of currency risk. A company being affected by the change in the price of a currency against another one.
2. What does it look like in the real world?
Microsoft has recently lowered the company's profit and revenue forecasts due to the strength of the US dollar. As Microsoft makes roughly 50% of its business outside of the US, its exposure to currency fluctuations is substantial.
But this could be a welcome advantage for some foreign companies doing business in the US. For example, Mercedes, Toyota, and Samsung can all benefit from a strong dollar against their local currencies. They can lower their prices and hence increase demand for their products.
In this email, we only focused on the US dollar but the same logic applies to other currencies and regions.
3. How is this relevant to the work of designers?
All multinational companies have departments that deal with currency risks. So, it's not the designers' responsibility to solve this problem. But it does not hurt to understand how currency risk affects your company or client. To see how currency fluctuations affect your business, do the following:
Costs - Figure out in what currency your company pays costs (salaries, product creation, etc.). For example, if most employees are employed in the US, the main currency for salaries is US dollars. Bonus points if you can figure out the relative size of these expenses. For example, salary is 30% of costs, 40% is production, etc.
Revenue - List all countries where your company is selling its products or services. Write down the currencies that they are sold in. Again, bonus points for figuring out market importance. For example, 40% US, 30% Japan, etc.
Determine where the biggest risk or opportunity is. For example, if you work for a European company that is paying salaries and other costs in euros while at the same time is generating more than 50% of its revenue in the US, this is a an opportunity.
Show your business confidence in the next meeting: "Have you seen the strength of the US dollar lately? This is our opportunity against competitor X. We could go more aggressively after the market and even lower the price while keeping our profitability."
Get patted on the back. 👏