Commercial Insights

How foreign exchange services can benefit business

As tariff headlines loom large the short-term and long-term impact to businesses across the U.S. is still somewhat uncertain. One thing that is certain is that international trade and investment has become a bit more complex.

When importing goods from foreign countries there are currency considerations for the purchaser. This is where foreign exchange (FX) trading services can benefit businesses navigating the volatile global supply chain.

What is foreign exchange?

Foreign exchange is the global marketplace where currencies are bought and sold and involves the exchange of one currency to another at an agreed-upon rate. The largest and most liquid market in the world, FX market participants like Regions conduct currency transactions on behalf of clients to manage and mitigate risks associated with international trade and investment.

The exchange rate determines how much one currency is worth in relation to another, so it can be beneficial for businesses using international suppliers to understand the currency alternatives for paying overseas vendors.

“Our clients are often importing goods to resell or buying equipment from overseas to use in their business,” notes Randy Lambeth, Managing Director, head of Financial Risk Management (Commodities, FX, Interest Rates), for Regions. “FX can play a key role in this type of transaction, helping businesses manage risk from rate volatility, managing cross-border transactions and supporting international growth.”

How foreign exchange benefits business.

Businesses can use FX to manage and mitigate risks associated with international trade for various reasons:

1. Hedging currency risk: Businesses with international suppliers and customers can face currency fluctuations. FX can help these companies hedge against the risk of volatile currency movements that could impact profit, costs or value of their goods.
2. International trade: Many businesses want to be paid in their local currency. Foreign exchange allows businesses to convert one currency to another, ensuring they can pay suppliers and/or receive payments from international customers.

“When purchasing a large piece of equipment that may take a year to manufacture, business clients can lock in an exchange rate through the use of a forward contract, for that future delivery date,” says Lambeth.

There are also ways businesses can leverage FX to find cost savings. For example, says Lambeth when buying from non-U.S. suppliers, there is often a benefit to request the price in the international currency rather than U.S. dollars.

Additionally, dual invoicing can be used for businesses engaged with global suppliers. This practice of receiving invoices in two currencies allows the buyer to agree on the currency in which the transaction(s) will be settled. These decisions can be made for convenience or based on market conditions and potentially lead to some savings for the business client.

An example of dual invoicing is when a U.S. company is buying products from Europe. It may request invoicing in both U.S. dollars and euros, offering the buyer flexibility to settle the transaction in the most favorable currency. This practice can mitigate exchange rate volatility that could impact the cost of the transaction. It also makes it easier for international businesses to manage currency differences as most suppliers are more comfortable being paid in their local currency or a globally recognized currency.

Tariffs and foreign exchange

“We are seeing clients advance their purchases of items they think could have tariffs – they are also holding inventory and buying sooner,” notes Lambeth. “We are not seeing as much hedging currently – rather we’re seeing increased orders now. We don’t know yet what happens as the tariffs come into play.”

The currency markets have become more volatile as tariff talks continue to create global headlines with a focus on the geopolitical landscape, interest-rate spreads or additional factors potentially influencing U.S. trading partners holdings of dollars and dollar-denominated assets accumulated since the COVID era.

“Most of the vulnerability is in Asia where our clients’ transactions in the local currencies are limited as they widely still use U.S. dollars primarily,” says Lambeth. “This may change if countries start to sell their U.S. dollar reserves. Volatility remains high in all currencies and our team is working closely with our clients as they navigate these events.”

To learn more about foreign exchange contact a Regions Relationship Manager.