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BUSINESS

Strengthening of the US Dollar and the Fashion Industry
By: Kelly Lanoue

The US dollar is getting stronger. While this may sound like a good thing, many international fashion retailers are taking a financial hit due to fluctuating conversion rates. It has become increasingly difficult for retailers to manage inconsistent demand with inventory and sourcing costs. The strengthening of the US dollar creates additional pressure on the already difficult set of post-pandemic circumstances, reflecting a shift in consumer spending as well as lingering supply chain issues. Fashion retailers must consider moving production back to the US to conduct profitable international business during these uncertain times. 

 

Essentially, the strengthening of the US dollar means that a single US dollar can be exchanged for more money in foreign currencies. For instance, if you are traveling abroad, you can purchase more expensive products and services using the US dollar. This “strengthening” of the US dollar is positive in theory, however, in the past, such instances have led to global debt crises. The growing strength of the dollar can be attributed to the monetary policies adopted by the US to fight rising inflation levels. As the Federal Reserve raises interest rates, the dollar gains strength. Despite talk in the US of inflation and an impending recession, the US is still in a better economic position than countries dealing with internal conflict, war, or the ongoing battle against COVID-19. During such uncertainty, investors tend to put their money into the safest assets. In other words, investors are more inclined to invest in property, bonds, or shares that operate using the US dollar because of its high value. As investors do this, they further the growing strength of the dollar. 

 

Both the unstable conditions and decline of currencies create a challenge for international businesses that conduct transactions across multiple currencies. The fashion industry is no exception to this issue. Retailers including H&M, Primark, and Nike have all expressed losses incurred when converting international sales back to US dollars. While international retailers across all industries are faced with this issue, the fashion industry is one of the most volatile industries in the marketplace. Fashion retailers plan years in advance to order large quantities of merchandise at set costs. These costs are negotiated with an anticipated margin needed to satisfy the expenses associated with bulk production. Fluctuating exchange rates will have a negative impact on this margin and result in a loss of revenue. 

 

When considering the concept of the strengthening dollar, it would seem that international fashion retailers would benefit from using cheaper materials and outsourcing labor. However it becomes a tricky situation when converting the sales abroad back to the US dollar. For example, Nike sources many of its products from China, Indonesia, and Vietnam. When Nike  converts these transactions to US dollars they are incurring a loss because the US dollar is currently much stronger than the Chinese renminbi (or yuan), the Indonesian rupiah, or the Vietnamese dong. Currently, Nike earns over half of its revenue from outside North America and is grappling with the impacts of the strengthening US dollar. Company leaders have doubled their prediction of the hit this phenomenon will have on their annual revenue. When looking towards the future, companies like Nike that rely heavily on international business must make major adjustments to minimize the impacts of a continuously strengthening US dollar on their bottom line. These adjustments could include sourcing materials local to production facilities or investing in a reliable supply chain, and most importantly, moving production back to the US. It is estimated that foreign exchange rates will have a negative $4 billion impact on Nike’s reported revenue. Many US brands are working to control their costs and reduce expenses in areas such as marketing and administration, with some companies even laying off employees

 

While reducing expenses is a short-term solution to solving this problem, it will be more beneficial for retailers to develop a long-term strategy to withstand financial fluctuation in the future. Garret Sheridan, CEO of Lotis Blue Consulting, suggests that retailers explore ways to practice better currency hedging. When retailers practice currency hedging, they minimize the risks associated with fluctuating foreign exchange rates. After COVID-19 devastated international supply chains, many retailers began considering bringing back production to the US and sourcing products from within the country. The added burden of fluctuating currency rates creates more of a reason for retailers to invest in facilities within the US to attain a financially secure form of production. According to Kearney’s 2021 Reshoring Index, a large majority of American companies with operations in China have already begun to move production to the US or plan to do so in the next three years. The prospect of conducting international business continues to become risky with rising tensions abroad, political strife, and struggling economies. These circumstances make it more attractive to move operations back to the US to avoid any further disruptions to profitability. There are more daunting circumstances to be thrown at international retailers in the coming years and businesses must plan accordingly if they want to survive. 

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