How the Dollar Affects Your Business / Income and What to do about it (Part 1 of 2)

Let’s face it, like many Asian countries, the Philippines is a US Dollar Remittance driven economy and I have been asked many times about how to deal with the rise and fall of the USD as many Filipino Dollar Earners, Overseas Filipino Workers, as well as Export and Import driven businesses earning capacity and/or profit margins largely depend on learning how to effectively deal with this issue.

So in this very special 2 part article, I will explain why the USD rises and falls, how it affects the peso and what you can do about it right now so that you can protect your money and possibly even make a nice profit for your self.

Before we begin, let me say that I have been invested in currencies since 1998, I am one of the very few in the Philippines who teaches currency trading and if I do say so myself, I am very good at it. So I hope you are excited to learn because here we go.

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A couple of years ago I gave a seminar to a group of Exporters about how they can protect themselves against the rise and fall of the Dollar. This seminar was an eye opener for all of them because the solution that I showed them was far simpler than they could ever imagine. Now you don’t have to be an exporter to know and apply this simple strategy yourself, as long as you have some dollars in your possession, this article should shed some more light on the subject and make you more intelligent in how you deal with your money.

To understand what makes the US Dollar fluctuate, let me first open your mind to what goes on outside the Philippines and talk about the fantastic world of global currencies. Then I’m going to zone in on the Peso and why and how the USD affects it and what I recommend that you do about it.

Now I’m sure that you have heard of Euros, British Pounds, Swiss Francs, the Japanese Yen, the Canadian Dollar, The Australian Dollar, The New Zealand Dollar and of course the US Dollar right? Well among these major currencies that I talked about, the US Dollar is the “heavy weight” of them all.

The US Dollar is what we call the world’s reserve currency which means that everything that is bought and sold in the global markets are all priced in US Dollars. If you are an exporter of whatever product from the Philippines selling to Japan, you do not get paid in Yen, you get paid in US Dollars. If we import rice from Thailand (which we do, in fact, we are the biggest importer of rice in the world) we do not pay in Thai Baht, we pay in US Dollars. Even if you are an overseas worker in Saudi Arabia, your salary will most likely be in US Dollars. This is why all countries for the purposes of global trading has to have an adequate supply of US Dollars in their reserves.

Now keep that in mind while I now teach you a little economics to understand why the US Dollar fluctuates.

In Economics, there is the most basic law of “supply and demand”. In simple terms, there will be Sellers (Supply) and Buyers (Demand). To explain how this law works let me talk about one of my favorite canned goods of all time: Hormel’s SPAM.

Now for example Hormel, the producer of SPAM says, “Okay starting tomorrow we will no longer produce SPAM (Supply diminishes) people like me who loves SPAM will start buying up the remaining cans right? (Demand goes up) So if supply continues to diminish because there are more buyers (demand), what will happen to the price of spam? It will go up (price fluctuates). Now, what if the next day Hormel announces: “we were just kidding, we’re not going to stop production, we’re going to triple production and just change the brand”…(Supply goes up) People like me will not be very happy and will most probably be disinterested in buying spam again (Demand diminishes), now what will happen to the price of spam? It will go down (price fluctuates again).

Now let’s go back to the US Dollar. All you have to do to understand why and how the dollar fluctuates is to simply replace the word SPAM with US Dollars, then replace Hormel with the US Federal Reserve (The US Central Bank that regulates the production of US Dollars) then read the example again.

The US Federal Reserve says, “Okay starting tomorrow we will no longer produce US Dollars (Supply diminishes) people like me who loves US Dollars will start buying up the remaining Dollars right? (Demand goes up) So if supply continues to diminish because there are more buyers (demand), what will happen to the price of US Dollars? It will go up (price fluctuates). Now, what if the next day the US Fed announces: “we were just kidding, we’re not going to stop production, we’re going to triple production”…(Supply goes up) People like me will not be very happy and will most probably be disinterested in buying US Dollars again (Demand diminishes), now what will happen to the price of USD? It will go down (price fluctuates again).

Understand it a little better now?

So the real reason why the US Dollar goes up or down is because of the mixture of buyers of US Dollars, sellers of US Dollars, Production of US Dollars, and the Allure of US Dollars.

Click here for part Two. I will explain how the USD affects the Peso, your business / income and what you can do to protect yourself.

Author box:

Mark So is a fervent businessman, forex trader and educator.  He is the Chairman and CEO of Businessmaker Academy—a business, finance and corporate training center.  He is also the Chief Forex Trainer of Forex Club Manila.  A sought after speaker for business and forex, he is scheduled to conduct his signature seminar series on Forex Trading this Feb 2, 4, 9, 11 (Tue & Thu).  To know more about these seminars, you may visit www.businessmaker-academy.com or call (632)6874645.  You may email your comments and questions to:   markso@zerocapitalclub.com

How the Dollar Affects Your Business / Income and What to do about it (Part 2 of 2)

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In my article last week, I explained that the US Dollar fluctuates because of the mixture of buyers of US Dollars, sellers of US Dollars, Production of US Dollars, and the Allure of US Dollars. (If you have not yet read that article, please click here: http://wp.me/pjUVO-2a

Now if you are an individual or a business that is greatly affected by USD fluctuations (i.e. Export-Import Companies, OFW’s or Local Dollar Earners), I’m going to share exactly what I do to protect the value of my money against erratic USD fluctuations.

***Disclaimer: This article is for educational purposes only and explains what I do with my own personal funds. This does not constitute financial advice and should not be treated as such. However, I do strongly recommend that you first consult with a Professional Financial Adviser about my methods AND get more educated first before you do anything***

So let’s begin our lesson today by first explaining how the fluctuations of the USD affect the Peso. I want you to remember this first and very important rule: The relationship between the USD and the Peso is “inversely proportional” to one another, meaning when one currency goes up by a certain amount, the other currency goes down by the exact same amount, at the exact same time always.

To make this concept clearer, I want you to think of and imagine a “see-saw”. The principle behind a see-saw is that when one side goes up, the other side goes down. Now imagine the USD sitting on one side of the see-saw, and the Peso on the other side. So when the USD goes up, the Peso goes down and when the USD goes down, the Peso goes up.

For example: You see in the papers that the USD is equivalent to 45 Pesos today, if tomorrow the published rate of USD becomes 46 Pesos that means the USD went up in value by 1 Peso, or in other words, became more expensive by 1 Peso. So if I wanted to buy the USD at the new rate, I would need 1 Peso more which means that the Peso dropped in value by the exact same amount (and the exact same time) that the USD rose in value.

Let’s continue the example, now let’s say that the USD is equivalent to 45 Pesos today, and tomorrow becomes 44 Pesos, that means the USD went down in value by 1 Peso, but at the same time, the Peso also went up by the exact same value because if I wanted to buy the USD now, I would need 1 Peso less.

(If my example is giving you a nose bleed, read it a few times and you will get it eventually)

Now keeping this in mind, here’s how I protect the value of my money against USD fluctuations. In the world of finance, this is what is known as “Hedging” or “dynamically protecting your asset(s) / investments against losses”.

So let’s say I have in my bank account $1,000 right now. If the USD is currently at 45 pesos and goes down to say 43 pesos, my $1,000 would lose value right? For some people / businesses in the same position, they would simply shrug their shoulders and just go with it, but for a great number of people / business, they might start to panic and start “converting” all of it to Peso for fear of losing even more money.  (Take note:  A small rise or fall of the price of dollars can be staggering if you are dealing with hundreds of thousands of dollars.)

Here’s a typical example: You have $1,000, the price goes from P45 to P43, you panic, change all your dollars to Peso which will now mean, your holding on to P43,000 ($1,000 x P43) but the next day the price goes back up from 43 to 45, because you panicked and did not know how to properly time your exchange, you lost P2,000 (P45,000 – P43,000).  If you have $10,000, you would have lost Php20,000.  If you have $100,000, you would have lost Php200,000.

While panicking is understandable, the problem with changing your USD to Peso may make you lose even more money unnecessarily as you can see in the example above. This would be especially true if you do not know if the value will continue to go down and more importantly, if you do not know how to “properly time” your currency exchange.

So in order to avoid these losses, and panicking altogether, here’s a simple strategy that I do to “hedge” or protect myself against these fluctuations.

If I have a Dollar account with my local bank (where I keep my dollar holdings), I simply open a brand new Peso savings account with the same bank. Take note, this is separate from my existing Peso account which I use for regular expenses. The purpose of this new Peso account is for me to start “hedging” my Dollars.

Once I have this new Peso account, all I do now is to “slowly” divide my dollar holdings into these 2 accounts. Meaning if I had $1,000, the end goal is to only have $500 in my dollar account and I will convert the other $500 to peso and deposit it in the newly created peso account. When I say “slowly” I mean I change a small amount every week until I completely divide my dollars into these 2 accounts.

This is what my dollar holdings will look like when I am done:

Why you ask? Because, and remember the “see-saw” example I gave a while ago, if and when the USD goes down, one half of my funds, the one half that I kept in dollars will go down, but the other half of my funds, the one that I converted to Peso will go up by the exact same amount, at the exact same time. This simple account split that I just did, will now protect me from USD fluctuations.

Of course, this method will have costs associated with it, the cost is the conversion rate from USD to Peso at the time that I convert my money plus the cost of maintaining another bank account. However, in the long run, regardless of the fluctuations of the USD, having a “hedged” account will “lock” in the value of my money until I choose to do something more profitable with it.  And as businessmen or dollar-earners, knowing how to protect your hard-earned money is a necessary skill that you must learn.  I hope that this article helps open your minds to the world of finance and how it affects money.  That way, we will all be able to manage our money better.

Author box:

Mark So is a fervent businessman, forex trader and educator.  He is the Chairman and CEO of Businessmaker Academy—a business, finance and corporate training center.  He is also the Chief Forex Trainer of Forex Club Manila.  A sought after speaker for business and forex, he is scheduled to conduct his signature seminar series on Forex Trading this Feb 2, 4, 9, 11 (Tue & Thu).  To know more about these seminars, you may visit www.businessmaker-academy.com or call (632)6874645.  You may email your comments and questions to:   markso@zerocapitalclub.com