![]() ![]() ![]() This meant that the € had weakened relative to the US$ (or the US$ strengthened relative to the €) by 19%. This made it less competitive for US manufacturers to export to a eurozone country. If, in the same period, the £/US$ exchange rate moved from £/US$0.6263 to £/US$0.6783, a strengthening of the US$ relative to £ of only about 8%. Make your goods in the country you sell them.Trade from the US to the UK would not have been so badly affected. Although raw materials might still be imported and affected by exchange rates, other expenses (such as wages) are in the local currency and not subject to exchange rate movements. This affects companies with foreign subsidiaries. ![]() If the subsidiary is in a country whose currency weakens, the subsidiary’s assets will be less valuable in the consolidated accounts. Usually, this effect is of little real importance to the holding company because it does not affect its day-to-day cash flows. However, it would be important if the holding company wanted to sell the subsidiary and remit the proceeds. It also becomes important if the subsidiary pays dividends. However, the term ‘translation risk’ is usually reserved for consolidation effects. It can be partially overcome by funding the foreign subsidiary using a foreign loan. Its statement of financial position would look something like this: For example, take a US subsidiary that has been set up by its holding company providing equity finance. The holding company’s investment is only US$1m and the company’s net assets in US$ are only US$1m. If the US$ weakens, only the net US$1m becomes less valuable. ![]()
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