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On the money: Why moving to Europe from America requires attention to potential currency impacts
Things are looking up. Your long-awaited promotion is coming, but there is a catch. You and your family must move to Belgium for a minimum three-year assignment. Few Americans get this type of opportunity, but in this new age of globalisation, foreign assignments are appearing on more resumes than ever before, especially for management-level employees. They are to be welcomed, but planning and preparation are key pre-requisites.
Once the excitement subsides, however, the issues that must be addressed can be overwhelming. Can you speak the native languages? What kind of living arrangements will you have? Where will your children go to school? How about health coverage and taxes, and what is your employer prepared to do for you? Expect to spend plenty of time with your Human Resources department.
The list of questions can go on and on, but one area that often gets overlooked is the impact of currency exchange rates on your financial plans. Over the coming months, you will soon become acquainted with euro to dollar foreign exchange (forex) charts and what they mean to you and your finances. The euro has been fluctuating wildly over the past two years, as the debt crisis in Europe has extended into its third year. It has bounced between $1.60 at its zenith down to $1.18, a 27 percent drop, and currently it is in the $1.21 to $1.25 area.
Imagine for the moment that your expenses in US dollars suddenly grew by 27 percent and your income level remained frozen. Could you survive under these circumstances? Protecting your family from these foreign exchange impacts is a process known as hedging, something that international corporations do on a daily basis. You don’t need to be a treasury analyst to hedge, but you can complete the necessary planning and then seek help from your employer or a financial expert at your bank. The degree of help provided by companies, unfortunately, is typically tied to how far up in the management chain you happen to be, but ask for every bit of assistance they can afford.
The hedging exercise consists of three parts – financial planning, hedge execution, and monitoring results. Everyone’s financial situation is different, but you must be prepared to outline your financial assets and liabilities, together with expected income and expense streams, for both before and after your move. You will have one spreadsheet for US dollars for US-related items and another for euros. The objective is to move things around such that the net income and expense in each currency is at a minimum. Fluctuations in exchange rates will then only affect the net amount, not the gross value.
For example, you may choose to rent your US home while away. You may require extra dollars to cover projected liabilities in the States. If your employer can pay a portion of your income in dollars and the remainder in euros, you can easily balance flows in dollars. If you are paid totally in dollars, then you must regularly transfer amounts to buy Euros, thereby subjecting yourself to forex rate swings.
Executing a hedging plan with forex securities can be a difficult task best left to professionals. Your local banker can help you here, as long as they have a global presence. Implementing a plan and monitoring its progress will become an ongoing activity between you, your banker and employer.
Moving to Europe can truly be a life-changing event, but don’t ignore the vagaries of foreign exchange. Consult a professional to ensure your financial security.
This is a guest article by Tom Cleveland of forexcharts.net