The Dollar’s Ups and Downs -- International Treasurer1995Mar20
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nternational Treasurer The Corporate Treasurer s Guide to Global Financial Management March 20, 1995 The dollar fall The ing is Dead By \oseph Neu US companies need to start adjusting to a world where the dol _ ar is just another currency. The ki ng i s dea d Th e US doll a r is no longer the world reserve currency or its best store of value. To many treasurers outside the US , this event was anticipated and changes little. However, for treasurers at US multinationals, this change has mammoth implic atio ns. It will require a major rethinking of long-st and in g FX policy assumptions, many of which were true only as lo n g as the US dollar remained the world ' s reserve currency. Now it is merely one of three- and the weakest at that. What has this changed? The world's f inancial markets appear to hav e resoundingly rejected the assumption that the best way t o maximize the value of future cash flows is to make them US dollar denominated. Inv estors wan t a more global and diversified portfolio- one that is not bound by the eco nomic policies of a sin g le government. As a resu l t, such common US treasury practices as ful l y hedg i ng no n- do ll ar tr ansac tion a l ex po sures, billing in dollars, le v eragi n g foreign operations wi t h only loc al debt, and maintain ing only dollar operating accounts will need to be reconsidered. A ll major multinationals, whether US-based or not, sho uld follow the l ead of central banks and inv estme nt funds and think in terms of a basket-like eco nomic base, s uch as one com prised of the three major re serve currencies , and manage their currency positions accordi ng l y . They also s hould manage their cu rr ency exposures more actively to deal wi t h the distin guish in g characte risti c of today's FX markets: volatility and dramatic overshooting as money f l ees the day' s perceived weakest of the three. The l ast a nchor of the Bretton Wood s stability is go n e. Argenti n a's currency board Misunderstood and Maligned By Steve H. H anke The j o hn s Hopkin s University Having withstood one of the most vicious attacks in recent memory, Argentina s curren- cy board system is alive and well. Spring ar r i ved ea rl y in the Northern H em isphere. In l ate December, the events in Mexico brought the bears out of hibernation, and they were in a most foul mood . They left a n indi scrim in ate path of destruction all the way from Mexico to the Southern Cone of South America. Argentina was not spared. And , until the afte rnoon o f March 9 , things in Buenos Aires look ed gr im. What s so aston i sh in g about this i s the fact t hat the Argentine sit uat ion is totally different from that in Me x ico see back page for what might have been if it were not ). On April 1 , 1991 , Argentina installed a currency board-like system. Under this system, its monetary base mu st be 100 covered by US dollar denomi nated assets and the peso and the US dollar are free ly convert ibl e at a fixed fate of 1 1. This sys tem is th e only one of its kind in the didn Indeed , t hey, alon g w ith their handmaidens in the press , heaped an avalanche of cr iticism and confus ion on Argentina's unique system. Oft repeated transgressions Th e following a r e some o f the most often repeated transgressions: • President Menem is going to dump his ab l e Minister o f the Economy D r . Domingo Cavallo. In a private dinner meeting with both gent l emen, during the World Economic Forum in Switzerland l ast Febru ary, my wife a nd I h e lp ed co nvi nce President Menem to make dispelling this rumor one of the central themes of his forma l after -dinner address at the Forum . continued on b ck p ge The King is Dead B y joseph Ne u L earning to cope with the US dollar a s ust anothe r weak) reserve currency. page 7 Misunderstood and Maligned B y Ste v e H.Hanke Argentina weathers one of the worst sto rms faced by a f i xed- r ate currency regime for some time. page 7 Hedging X Risk with RiskMetrics By Prof ian Giddy an d J eff r ey W a ace In pursuit o f the Hol y Grail: reducin g risk and cost without tak in g a market v i ew. page Reactions to New Hedge Accounting B y Hal D av i s The pros a nd cons being expressed by corporates about the new US hedge accounting proposal. page4 An MCM Duo Estee L auder and Genentech tell their stories on MC M ' s FX system for W ind ows . page 6 What Might Have Been With Argentin a co m ing out of th e woods , Me x i co looks headed for a banking cris i s . pa g e 8
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The impertinent impermanence of the dollar can cause headaches for those declaring its death.
Transcript of The Dollar’s Ups and Downs -- International Treasurer1995Mar20
-
International Treasurer The Corporate Treasurer's Guide to Global Financial Management March 20, 1995
The dollar fall
The King is Dead By \oseph Neu
US companies need to start adjusting to a world where the dol_lar is just another currency.
The king is dead. The US dollar is no longer the world reserve currency or its best store of value. To many treasurers outside the US, this event was anticipated and changes little. However, for treasurers at US multinationals, this change has mammoth implications. It will require a major rethinking of long-stand ing FX policy assumptions, many of which were true only as long as the US dollar remained the world 's reserve currency. Now it is merely one of three- and the weakest at that.
What has this changed? The world's financial markets appear to have resoundingly rejected the assumption that the best way to maximize the value of future cash flows is to make them US dollar denominated. Investors wan t a more global and diversified portfolio- one that is not bound by the eco-nomic policies of a single government. As a resu lt, such common US treasury practices as full y hedg ing non-dollar transaction al expo-sures, billing in dollars, leveragi ng foreign operations with only local debt, and maintain-ing only dollar operating accounts will need to be reconsidered.
All major multinationals, whether US-based or not, should follow the lead of central banks and investment funds and think in terms of a basket-like economic base, such as one com-prised of the three major reserve currencies, and manage their currency positions accordi ng-ly. They also should manage their cu rrency exposures more actively to deal with the distin-guish ing characteristi c of today's FX markets: volatility and dramatic overshooting as money flees the day's perceived weakest of the three. The last anchor of the Bretton Wood's stability is gone.
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Argenti na's currency board
Misunderstood and Maligned By Steve H. Hanke The johns Hopkins University
Having withstood one of the most vicious attacks in recent memory, Argentina's curren-cy board system is alive and well.
Spring arr ived ea rl y in the Northern Hem isphere. In late December, the events in Mexico brought the bears out of hibernation, and they were in a most foul mood . They left an indi scrim inate path of destruction all the way from Mexico to the Southern Cone of South America. Argentina was not spared. And
, until the afte rnoon of March 9 , things in Buenos Aires looked grim.
What's so aston ish ing about this is the fact that the Argentine situation is totally different from that in Mexico (see back page for what might have been if it were not). On April 1, 1991 , Argentina installed a currency board-like system. Under this system, its monetary base must be 100% covered by US dollar denomi-nated assets and the peso and the US dollar are free ly convertible at a fixed fate of 1 :1.
This system is the only one of its kind in the Americas . But this didn ' t impress the bears: Indeed, they, along w ith their handmaidens in the press, heaped an avalanche of cr iticism and confus ion on Argentina's unique system.
Oft repeated transgressions Th e following are some of the most often repeated transgressions:
President Menem is going to dump his ab le Minister of the Economy, Dr. Domingo Cavallo. In a private dinner meeting with both gentlemen, during the World Economic Forum in Switzerland last February, my wife and I helped convi nce President Menem to make dispelling this rumor one of the central themes of his forma l after-dinner address at the Forum .
continued on back page
The King is Dead By joseph Neu Learning to cope with the US dollar as just another (weak) reserve currency. page 7
Misunderstood and Maligned By Steve H.Hanke
Argentina weathers one of the worst storms faced by a fixed-rate currency regime for some time. page 7
Hedging FX Risk with RiskMetrics By Prof. ian Giddy and Jeffrey Wallace
In pursuit of the Holy Grail: reducing risk and cost without tak-ing a market view. page2
Reactions to New Hedge Accounting By Hal Davis
The pros and cons being expressed by corporates about the new US hedge accounting proposal. page4
An MCM Duo Estee Lauder and Genentech tell their stories on MCM's FX system for Windows. page 6
What Might Have Been With Argentina com-ing out of the woods, Mexico looks headed for a banking cris is. page 8
