U.S. companies with international operations are increasingly using cross-currency swaps to convert their dollar debt into euros, helping reduce their borrowing costs. This trend comes as euro interest rates remain lower than U.S. rates, and businesses seek ways to manage the impact of rising interest rates. Corporate advisers and bankers say that the strategy is gaining traction as the Federal Reserve maintains a pause on rate cuts, while other central banks take different approaches. The use of these swaps allows companies to hedge against currency fluctuations and soften the financial strain caused by higher interest rates.
Cross-currency swaps, which allow companies to exchange loan principal and interest payments from one currency to another, have seen a 7% rise in activity for EUR/USD swaps in January 2025 compared to the same month in 2024. These swaps are popular among businesses looking to shield themselves from currency volatility, especially in the wake of macroeconomic uncertainty caused by U.S. policies under President Donald Trump. His tariffs on steel, aluminum, and other products have sparked concerns about inflation and the potential for a prolonged pause in U.S. rate cuts.
For companies with overseas investments or cash flows, the volatility in exchange rates between the dollar and foreign currencies can significantly affect their financial position. Cross-currency swaps can help mitigate this risk by offsetting changes in the value of these investments due to fluctuations in exchange rates. By converting dollar-denominated interest payments into euros, companies can reduce their borrowing costs by as much as 200 basis points, potentially saving millions of dollars.
Despite the benefits, there are risks involved in these swaps. Companies must be cautious about exposure to potential mark-to-market losses if the foreign currency strengthens against the dollar, which could erode savings on interest expenses. As such, some companies have been hesitant to engage in swaps due to the uncertain economic environment and potential for adverse currency movements. However, for those companies already using these strategies, the opportunity remains attractive, particularly given the interest rate differentials between the U.S. and other major economies.
SOURCE: REUTERS
