NEW YORK/CHICAGO: Last year's extraordinary currency market volatility has sounded a loud wake-up call for US corporate treasurers seeking to cash in on dollar declines, guard against an unforeseen rebound, or both.

During 2003, many US companies with a big slice of their revenues from Europe reaped robust returns from a declining dollar, which shed 17 per cent against the euro.

Their products sold abroad generated a currency fillip for such exporters once the proceeds were converted into dollars.

For instance, Procter & Gamble Co, the world's largest consumer products maker, expects sales growth of 14-18 per cent in its second quarter, with 3-4 per cent coming from foreign exchange.

Sales at McDonald's Corp, the world's largest restaurant company, have been boosted for several months by the weakened dollar.

The dollar drop might well continue into 2004. Or maybe it will not. Either way, US companies need to be ready.

Choppy waters

For Lake Forest, Illinois-based Brunswick Corp, the world's largest maker of pleasure boats, nearly 30 per cent of its sales are outside the United States.

That means forex fluctuations make a big difference to its bottom line.

"As our international business has grown - and it probably has grown faster than the domestic side - over the last year or two, we've had to become more aggressive and sophisticated in terms of looking at our hedging activity," said Peter Leemputte, chief financial officer.

The dollar decline of 2003 boosted Brunswick's earnings, he said, but added the company used derivatives to hedge against unexpected swings in the dollar to reduce risks.

Such protection generally comes at a cost.

US companies that are paid in foreign currencies often use forwards and options to hedge against currency fluctuations that might erode their earnings.

Forwards and futures contracts obligate the holder to buy or sell a specific amount of currency at a set price on a specified date.

The contracts allow forex traders to lock in a currency price regardless of shifts in the spot market.

Options contracts grant their purchasers the right, but not the obligation, to buy or sell a specific amount of currency at a set price within a specified period.

"You never know when is the right moment (to predict a turn in the dollar), so what we are suggesting to people is that you layer in the coverage and dollar cost average," said Anil Agarwal, managing director with Brown Brothers Harriman in New York.

Dollar cost averaging means staggering an investment in order to avoid putting all one's eggs in one basket at the same time.

That can protect against unforeseen twists in the market and smooth out the effects of volatile exchange rates.

In hindsight, for many US companies seeking maximum profits from the dollar's decline, the most lucrative forex strategy in 2003 would have been to forego hedging against dollar gains.

Front page news

Whatever the method, US financial directors, deluged with front page news on the dollar's sag to record lows against the euro and multiyear troughs against an array of other currencies, are being driven to seek more information on currency strategies.

Exploding interest in forex strategies, meanwhile, has resulted in burgeoning business for the companies that advise them on such tactics.

"It's definitely in the headlines, so we get a lot more attention and we're getting a lot more calls and a lot more interest," said Philip Simotas, president of FX Concepts, a New York-based money management firm.

"People who never talked about currencies, all of sudden are beginning to talk about currencies and the ramifications of exposure that they've got, and also the opportunities that maybe they didn't really look at before," he said.

Even though many currency analysts expect the euro to rise from last Wednesday's US$1.2703 level in New York to above US$1.30 and perhaps scale US$1.40 or more later this year or next, that is far from being a sure bet.

One can never be certain when the dollar will snap back.

Just as the greenback has surprised by the depth of its decline over the past two years, so the currency will likely surprise with the magnitude of its rebound.

"Clearly, something big is happening. We're getting close to some sort of significant cyclical turning point in the market," Simotas said.

"Whether it's in the next two months or the next six months, we're really not sure. This one-way move in the dollar can't go on forever."

Agencies via Xinhua

(Business Weekly 01/20/2004 page6)