The Fate of Dollar Dominance: FX Management Strategies during Currency Volatility
The dollar has been the world's main reserve currency since the Second World War – backed by the strongest economy, military and deepest capital markets. It's been the epitome of value around the world. According to the IMF, the US dollar represents 60% of worldwide foreign exchange reserves. The second currency, the euro with 20%, doesn't come anywhere close.
However, since the start of President Trump's second term, finance leaders and economists have been watching carefully the trade and economic policies coming from his office, knowing well that the goal is to weaken the home currency in an attempt to support US exports and reduce the US trade deficit. The announcement of trade tariffs imposed equally on allies and enemies of the US, followed by the 90-day pause, has sent markets into a tailspin, as the finance world started asking – what is the fate of the dollar's dominance?
The experts alert that historical data shows currency swings of up to 10% following major policy announcements. For CFOs and Treasurers, these macroeconomic forces elevate currency risk from a technical concern to a strategic issue. When currency movement can risk profitability of a service or product, or derail capital investment returns, FX management becomes essential. Businesses operating cross-border, especially those with dollar exposure, can no longer treat currency as a compliance matter but as a variable contributing to financial health and competitive advantage.
The US Dollar Rollercoaster
The strength of the US dollar has fluctuated significantly over the past few decades, often in response to major shifts in global economic power and geopolitical developments.
One of the first major turning points occurred in 2001, when China joined the WTO. This moment marked a rebalancing of economic power away from the US and toward China and other emerging markets. As global demand for commodities grew, driven by China’s rapid industrialisation, so did the GDPs of emerging economies. This surge weakened the dollar as capital flowed into these growing markets.
A second shift came around 2011, during and after the eurozone crisis, which coincided with a slowdown in China’s economy. As uncertainty grew in Europe and China, global investors once again turned to the US dollar as a safe haven, pushing its value higher. This marked a return to dollar dominance.
More recently, policy decisions during President Trump’s second term have brought new uncertainty. His administration pursued a strategy of trade tariffs, targeting both US allies and competitors, with the aim of weakening the dollar to boost exports and shrink the trade deficit. The rollout was turbulent- starting with sweeping tariffs and a hard stance, followed by a 90-day pause and reduced tariffs (down to 10%) for most countries, except China.
These events left the markets confused and volatile. The inconsistent approach of claiming no exceptions initially and then backtracking, made it difficult to forecast the dollar's direction and these currency movements, whether up or down, tend to ripple through the global economy, affecting everything from trade flows to investment returns. Treasurers and finance leaders need to therefore develop consistent and robust strategies to protect the stability of their businesses as currency fluctuations become inevitable.
Strategies to Manage Foreign Exchange Risk
Step 1: Identify Key Risk Management Metrics and Triggers
Treasury teams need structured approaches to monitor real and potential currency shifts. Key metrics to track include:
Establishing these trigger points around those indicators will allow treasury teams to make better hedging decisions, perhaps even semi-automate certain actions, but also feed into wider forecasting that drives strategic decisions.
Step 2: Develop a Comprehensive Hedging Programme
Corporate treasurers are a bit more careful with their approach to FX hedging and slower to adopt technology, however, given the current macroeconomic landscape, especially for organisations with Dollar-denominated trades, a more advanced and hands-on approach is needed, as reported by Reuters.
Modern FX risk management should extend beyond transaction-level hedging to comprehensive programmes that focus on the financial health across the entire business and include:
With this comprehensive approach, it often becomes evident that focusing on just transaction exposure often understates the true FX exposure. Just as an example, a manufacturing business might have limited direct exposure to a particular currency but face significant margin pressure if competitors benefit from reduced prices as a result of currency depreciation.
Step 3: Select the Right Hedging Instruments
The optimal hedging toolkit in uncertain environments should encompass at least these three components:
Forward contracts – Provide certainty by allowing you to lock in an exchange rate for a future date, at zero upfront cost. The downside is, however, that they lock in rates regardless of the market direction
Options – Offer protection and upside potential, however, come at a premium cost. These are particularly useful during times of heightened instability as treasurers are able to justify costs by quantifying potential earnings in the event of adverse currency movement. A 2% premium payment appears rational when protecting against movements that could impact earnings by 8–10%.
Structured solutions – e.g. participating forwards. These will provide partial upside and core protection.
Step 4: Consider Natural Hedging to Manage FX Risk
Beyond hedging instruments which provide immediate protection against market fluctuations, operational changes that align currencies of revenues and costs can build structural resilience and reduce dependency on hedging and exchange rate movements.
Natural hedging strategies can mean relocating or dual-sourcing production so that the production currency matches that of sales. Alternatively, businesses can renegotiate supplier contracts to align payment currencies with revenue streams or implement a currency adjustment clause in customer contracts.
In order to manage currency risk,, businesses can also diversify funding sources across denominations and open foreign currency bank accounts in their operating jurisdictions to match exposures.
Step 6: Rethink The Treasury Model
Whether your treasury operations are more centralised or decentralised will have an impact on how successfully you can implement your FX risk management strategy. Centralised models offer increased visibility, concentration, and netting opportunities but may be less agile in responding to local market conditions. Decentralised approaches provide better flexibility through proximity to local markets but present issues with implementation of consistent policy and visibility across the business. Given the economic instability, the best model for multinational businesses might combine a blend of both whereby:
This balanced approach combines the efficiency of centralisation and the market responsiveness of local operations – the next problem is, though, how can technology enable this approach?
Technology Considerations to Mitigate Exchange Rate Risk
A prevailing challenge that group treasurers of global businesses have been reporting has been the lack of visibility into cash and, as a result, complete FX exposure. Without this global visibility, even with the best local intelligence and hedging expertise, finance experts are limited in how they can protect the business from potential losses.
Thankfully, modern treasury technology provides real-time visibility into currency exposures across the enterprise, currencies and institutions. These tools aggregate data from ERP systems and bank feeds as well as trading platforms to present a comprehensive view of exposures and positions that can be then filtered by business unit, time, and currency pair to inform better hedging decisions. This is particularly valuable for understanding correlations between currency pairs and identifying natural offset opportunities. Rather than managing each currency in isolation, treasury teams can optimise the overall portfolio to reduce hedging costs while maintaining protection levels.
AI Applications in FX Management
Artificial intelligence and machine learning algorithms are more commonly used in currency risk assessment as they are able to analyse vast datasets and identify patterns that traditional models might miss. These systems examine economic indicators, central bank communications, social media sentiment, and trading flows to provide accurate forecasts and multiple scenarios that can be taken into account.
Beyond forecasting, AI systems help identify correlations between business metrics and currency movements that might not be obvious through traditional analysis. As an example, an ML model might pick up that a particular product's profitability correlates strongly with certain cross-currency relationships rather than with direct exchange rates against the reporting currency. Equipped with these insights, treasurers are able to make better hedging decisions that drive actual business results.
Integrated Systems for Seamless Execution
Integration between treasury management systems, the ERPs, and trading execution platforms creates a more agile, responsive system and in doing so, businesses can automate and simplify certain operations. With fewer manual interventions and steps, there are fewer delays and errors, which directly translates into more efficient management of risks.
On top of that, these integrated systems often offer benefits with less cost and complexity, while delivering better visibility when managing cross-border operations. For example, emerging payment technologies, such as multi-currency accounts that allow companies to maintain balances in multiple currencies without establishing separate banking relationships in each country.
Conclusion
The real question isn't 'Is the dollar dominance over' but 'Are you ready for when it isn't'.
With the future of this currency being uncertain, FX risk management has become a critical issue for multinational businesses. The organisations that excel in this unstable environment are those that treat FX management as a core task of the treasury function.
For CFOs and Treasurers looking to strengthen their approach to FX, platforms like Fyorin offer a unified solution that combines multi-currency accounts, automated payment workflows, and integrated hedging tools. By centralising visibility across all currencies and accounts in one platform with one login and automating key FX functions, Fyorin helps finance teams transform currency management from a reactive necessity to a strategic advantage in increasingly complex global markets.
Fyorin, your financial partner
Fyorin, a financial operations platform for digital businesses, automates and monetizes the movement of money, making financial operations smoother, faster and more efficient. The platform eliminates 90% of manual work, allowing businesses to connect with their preferred accounting platform to automate receivables and payables.
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