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The Greenback and International Currency for Contractor Payments

Dollars are still king. Photographer: Thomas Trutschel/Getty Images

Payments for International Contractors

Lou Calamaras, CCWP Global Client Director, CXC Global North America

“Still the preferred currency around the globe as a trade for business services, the US dollar allows for international contractors to accept a currency that is common in their home country.  The downside to those who pay multinationals for services is that country where the worker resides would miss out on taxes and are looking to recoup in order to pay for their roads, infrastructure, government services.  Just like here in the US.  Even paying the US dollar through a US corporation to the worker’s in-country corporation is still non-compliant without a currency conversion by the entity.” Lou Calamaras, CCWP, Global Client Director, CXC Global North America.

The greenback continues to meet my six long-run criteria for a dominant international currency.

In a recent article published by bloomberg.com, the US dollar is recognized as still being the currency of choice for international transactions and it’s predicted to continue this way.

CXC Global manage payments to contractors as part of its compliant global contingent workforce solutions, in over 70 countries and has been doing so for over 25 years.

Although payments are often made in the local currency where the contractor is residing or carrying out the work, many contractors still prefer to be paid in US Dollars.

When transacting in the local currency, CXC Global manages the currency conversion from invoicing through to contractor payments.

“The most recent data from the International Monetary Fund on the composition of global foreign-exchange reserves paints a dour picture of the dollar. After a brief respite in the wake of the global financial crisis, the greenback’s share of reserves is back on the decline, falling to 62.7 percent as of the end of 2017, the least since 2013. At the peak in 2001, the dollar accounted for 72.7 percent of worldwide reserves. On top of that, the value of America’s currency has been depreciating fairly rapidly, with the Bloomberg Dollar Spot Index tumbling 11.3 percent over the past five quarters.

 So, given the outlook for worsening U.S. debt and deficits, is it time to throw in the towel on the dollar? That would be premature. Despite the recent rough patch, the dollar’s preeminent status should remain intact because it continues to meet my six long-run criteria for a dominant international currency, revealed by our study of exchange rates since ancient times.
  1. Rapid growth in the economy and gross domestic product per capita. The recent U.S. tax cuts as well as enhanced military spending and infrastructure outlays should push annual real GDP to the 3.0 percent to 3.5 percent level versus the 2.2 percent since the recovery began in 2009. On the supply side, labor will likely be ample even without sizable immigration as youths who stayed in college during the Great Recession look for jobs and discouraged workers continue to return. American productivity growth has been slow but should catch up as new technologies grow large enough to move the aggregate needle.In contrast, Europe is dragged by the lack of a common fiscal policy to complement the common currency. Japan’s two decades of slow growth will persist as its aging and declining population portend slower growth and more resources are devoted to retirees. In the usual development pattern, China’s growth is slowing as it matures while the earlier one child-per-couple policy and continuing low fertility rates will depress new labor force entrants. Also, U.S. President Donald Trump will probably limit the transfer of growth-enhancing American technology to China.
  2. A large economy, usually the world’s biggest. China’s GDP, the world’s second-biggest, is still just 58 percent of America’s. More important, its GDP per capita is only 15 percent of the U.S., and to close the gap, its GDP would need to grow about 10 percent per year for three decades. In last year’s fourth quarter, growth was 6.8 percent and continues to slow. Some countries such as Switzerland and Singapore are attractive, but are far too small to support global currencies.
  3. Deep and broad financial markets. International money — especially with today’s electronic trading –wants to be where the action and liquidity are. The U.S. stock market capitalization as defined by the New York Stock Exchange and the Nasdaq is $27.4 trillion, dwarfing the euro zone’s $8.8 trillion, China’s $7.3 trillion and Japan’s $5 trillion. U.S. sovereign debt stands at $15.3 trillion, and foreigners own half of it. That compares with $7.6 trillion in Japan, where foreigners own just 7 percent, $6.1 trillion in China and $1.6 trillion in Germany.
  4. Free and open financial markets and economy. Foreign investors are willing to hold a country’s currency if they face few restrictions. The World Bank ranks the U.S. sixth out of 189 countries for business-friendly regulations while the top five are small countries. The U.K. is seventh, Germany is 20th and Japan is 34th. China is a distant 78th with its semi-controlled economy with a mercantilist policy. Furthermore, China’s heavy dependence on exports is reflected in the tightly controlled and at times manipulated yuan. Japan’s zeal for exports also leads to attempts to control the yen. In Europe, Germany and the Netherlands are relatively open economies for foreign investors, but that’s not true for the euro zone as a whole.
  5. Lack of substitutes. The Chinese want the yuan to be a global currency, but are unwilling to adopt the free and open financial markets that are required. Japan resists the yen becoming a global currency. The euro has been untroubled lately, but the threat of a euro-zone breakup is not completely gone after Greece threatened to leave several years ago. Today, immigrants from Syria and elsewhere are causing major worries in Europe, contributing to Brexit. Some 87.6 percent of global foreign-exchange market turnover involves the dollar. The euro is a distant second with 31.4 percent, while the Chinese yuan is involved in just 4.0 percent. The total adds to 200 percent since two currencies are involved in every transaction.
  6. Credibility. That is essential for a primary global currency, and there can’t be major concerns about devaluation. As the global premier currency, it’s difficult to see how the greenback could be devalued unilaterally. Against which currencies? Confidence can be fickle, but the dollar’s credibility is likely to improve as the U.S. current-account shrinks. Among other reasons, the postwar babies have been poor savers throughout their adult lives, and need to save robustly as they increasingly face retirement, or work until they die.

Click here to see the original article posted on Bloomberg.

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