Disadvantages in dollars

Tom Ford, owner of Hey Jhonny in Nob Hill, displays some of his eclectic art and gifts from around the world. Ford buys all of his shop’s merchandise using the currency of the products’ countries of origin. (Roberto E. Rosales/Albuquerque Journal)

These days, even small businesses buy and sell internationally, and many of them try to eliminate the hassle of dealing with different currencies by doing all transactions in dollars.

That’s a mistake that could cost up to 15 percent of the business’s profit, said Andres Bergero, senior foreign exchange adviser with Bank of the West.

“An importer thinks it’s much easier to ask a producer in Asia or Mexico or Europe to invoice in U.S. dollars,” Bergero said. “When a small business does this, they are now subject to an increase in price because the manufacturer has to protect itself. They have no idea where the currency will be by the time they get paid from the United States. They don’t know, so they charge for it. Typically you’re looking at 10 to 15 percent (increase in the cost of goods) for small businesses to protect the overseas exporter, to protect himself (from currency fluctuations) to give you the U.S. dollar invoice.”

“Instead of asking to be invoiced in U.S. dollars, ask for it in euros, pesos, yuan, loonies,” Bergero said. “The buffer the company puts in place is gone. Now the exporter doesn’t need the buffer. There will be a price benefit to the importer by buying in foreign currency. We see that time and time and time again.”

Tom Ford operates Hey Jhonny in Albuquerque’s Nob Hill district. He describes it as “an eclectic mix of art and gifts from around the world – a merging of all cultures.” On any given day the store could carry merchandise from Italy, Argentina, Morocco, Asia or just about anywhere else. Ford buys all of it using the currency of the products’ origin.

Ford’s international focus keeps Hey Jhonny unique. “That’s what people think of us as being,” he said. “If you’re not doing international buying and dealing with foreign currencies, you’re like any other store on the strip. The product mix we can offer is one we would not have if we didn’t do international traveling and buying. Currency is just something you deal with. In some countries it’s easy, in some countries it’s not.”

This selection of items from Africa are displayed along with art and gifts from around world at the Hey Jhonny store on Central Avenue in Albuquerque’s Nob Hill district. (Roberto E. Rosales/Albuquerque Journal)

Ford saw how currency differences could work to his advantage when “years and years ago” he was on a buying trip in Italy. The Italians were using the lira then, and their currency was incredibly cheap, Ford said. Buying goods with lira saved money because Ford was able to buy the lira he needed inexpensively with dollars.

Now that Italy and other countries use the euro, which is more expensive than the dollar, some prices have become “ridiculous,” he said.

Once Ford has identified products he wants to import he likes to lock in the price in the local currency immediately. He will arrange quick bank transfers or charge the goods to a credit card.

Other businesses that cannot or do not want to pay the seller immediately might benefit from futures contracts to eliminate the risk that a currency will become more expensive when the bill comes due, thus driving up the buyer’s cost, Bergero said.

“The moment the business has a currency risk is the moment the purchase order is locked in,” he said. “At that moment, that invoice becomes a payable. That’s the time to effect a cover or a hedge for the transaction.”

Say a €10,000 payment for the imported goods is due to the exporter in 40 days. The importer can buy a forward contract through a bank that locks in today’s exchange rate, so “you know exactly to the penny what €10,000 will cost,” Bergero said. And because the importer took the currency risk, the goods should be cheaper, leaving the importer with more room to add profit, Bergero said.

Banks calculate the price of contracts based on the difference in interest rates found in the two countries involved in the currency transaction. Say the bank’s cost for borrowing euros is higher than the interest rates they can earn on dollars they deposit. The bank in effect borrows euros at one interest rate on behalf of the importer and holds them in a dollar-denominated account earning another interest rate. The importer compensates the bank for these costs.

A contract to buy €10,000 worth of euros to be delivered in 40 days would mean about a $30 expense to compensate the bank for these costs.

There are risks in such transactions. For one, the contract can’t be canceled without the consent of both parties, so if euros became much less expensive in a hurry the importer might have been better off paying the spot price for euros rather than buying a contract.

Some currencies are volatile, which means the risks of losing money on transactions is higher. Ford said doing business with Japan has become more difficult “because the yen is so out of control against the dollar. They are constantly dealing with fluctuations in the market.” Exporters warn in their catalogues that prices are subject to change without notice because of currency volatility, he said.

Some currencies are “more troublesome to deal with than others,” and some banks are more experienced at dealing with trading them than others, Bergero said. “Years ago the (Chinese) yuan was a pain to deal with. Now the regulations have changed so it is easy for us to deal with.”

Venezuela, Chile, Argentina and Indonesia are “problematic” currencies, he said. Canada, Mexico and most Asian currencies can be easily arranged.

“This isn’t for everyone,” Bergero said. “There may be a situation where this is not a good fit for the customer, so have a conversation with your banker. Does this make sense? What are the risks and returns?”