Discussing The Currency For International Payment

Reasons for Using USD for Payment

The currency that would be used for payment would be in U.S dollars between the countries Australia and the United States.  The reason for this is that USD is the dominant and global currency. The reliability is because it acts as the store of value. This is one of the widely accepted forms of international payments. There is also the existence of the liquid dollar financial market. USD has long dominated as a currency so it is now considered an important part of the international financial infrastructure of trade. Economy of the United States is larger in respect to that of Australia. The financial market of the United States is seen to attract most of the countries. The foreign exchange is quite comfortable with the use of US dollars. There is no wide fluctuations noticed in dollar stability is the reason why the exporters and the importer they consider the currency of the United States for exchange. In case of international trade, USD is commonly used. The exchange rate is quoted as per the value of the currency, which is the expressed in USD. When there is actual exchange taking place then the role of USD  also gets important When the  United States company imports Bega cheese the payment that is made to the Australian export firm is in the form U.S dollars. The exporter then exchanges the currency to Australian dollars in the exchange rate market. All the transaction with the United States by Australia will be conducted through US dollars, as the US is one of the largest importers of commodities from Australia.

The international status of dollar is the stability in the purchasing power stability and the confidence in the government to honour debts. The trader’s needs to consider that the dollar is a good store of value so there would not show a real decline in the exchange rate of dollar. The decline also diminishes in the term and medium term as well. This shows the strength of the United States and its prudence and coherence in the policies.

When looking into the both the country’s Australia and the United States the most realistic form of currency for carrying out the transaction is the use of US dollars. It is seen that the most dominant currency is the U.S dollar. A large share of the international trade is conducted through the US dollars. The 100-dollar bills of 75% and almost half of the 50-dollar bills are held in the overseas. It was stated by IMF that 60 percent of the reserves held by the central bank is in the form of USD (Venkateswaran 2012). Almost 90 countries they peg their currency to dollars and transaction in the foreign exchange market involves only USD. The reason behind the dominance of dollar is based on the Petrodollar Theory. The theory suggests the dollar is dominant as the exporters of oil they sell only through dollar. The rest of the activity of trade would also include dollars. This would help the country to gather enough dollars so that so that oil can be purchased. The theory goes on to say that, if the exporters of oil they stopped selling in dollars then the artificial demand for the currency would collapse (Rugman and Collinson 2012). This would lead to flooding of the currency that is no longer required for purchasing of oil. This would cause the interest rate and inflation to rise. The power is concentrated in the hands of few exporters of oil. As per the World Trade Organization, 19% of the fuels prices and the 80% of the non-fuel products are quoted in dollar (Wto.org 2016). The following are the reasons that suggest the preference of the U.S dollar:

Benefits of Using USD for Payment

The companies that export the commodities do not want the prices of the product to fluctuate in relation to the rivals. This would unnecessarily cause confusion among the customers (Rugman and Collinson 2012). All the transaction with the United States by Australian companies will be conducted through US dollars

When the price of the commodities quoted by the competitors are in dollars while the other company quotes its price in euro then with the fluctuations in the exchange rate the product price of the would be changing constantly changing in relation to the price of the competitors.

Since the United States is one of the largest economies and was one of the largest exporters as consequence dollar is the established currency for performing trade since the time of World War II (Mansfield and Milner 2012). Though the exports have reduced the currency is still preferred by the companies as it is already in use. There is less likely case for new entrants setting the new currency in the market. This shows that there is some sufficient inertia.

Apart from the United States being one of the largest economies, it is also largest in terms of the liquid financial markets, trade deficit and dominant political power. This shows that there is a steady flow of the dollars into the global market each year. The holder of USD in the foreign countries knows on the country to invest.

Apart from this reasons the rising euro is creating a trouble in the foreign exchange market. When looking into the international trade it is seen that 38% of the trade in quoted in euro while 35% of trade is quoted in USD (Bowen, Hollander and Viaene 2012). The reason for this is the growing exports from the European nation. Though there is a stiff competition between USD and Euro, it is difficult for the dollar to be dethroned as the global currency in recent times (Australia.gov.au 2016).

Thus, position of the United States is very strong so the transaction with Australia will be conducted through U.S dollars.

Both the exporters and importers face several exchange risks when international trade takes place.  The following are the risks that are commonly faced by an exporter.

Types of risk (Exporter)	Causes
Currency Risk	There is a regular fluctuation in the currencies and this would cause a delay between the time of entering into contract and making of payment to the suppliers.  The amount payable through the local currency during the time of settlement might be higher  than that of the amount calculated at the time of the contract The frequent change in the exchange has a significant influence on the margin of profit (Australia.gov.au 2016)
Delivery Risk	There may be occurrence of non-performance risk when there is repudiation of contracts by the buyer.
Credit Risk	There can be risk of insolvency, fraud, default and unwillingness in accepting goods.
Transfer Risk	Transfer risk exists when there is a need for making the payments for the contract in terms of a particular currency. There may be control introduced by the importer country when payment is done based on other currency.
Country Risk	There are countries that restrict the entry of the commodities. The control is monitored through the customs, excises and import licensing
Transport Risk	The risk during the time of transport involves loss, damage, pilferages during the time of transit.

Types of risks (Importers)	Causes
Currency risk	Too much fluctuation in the exchange rate  will affect the profits of importers
Non delivery risk	The importer might receive inferior quality goods from the supplier
Credit Risk	When there is payment made to the supplier before the product is shipped, the importer has no probability of getting the payment back
Transfer Risk	The manipulation of the government regulation will restrict in making payment (Blakeney 2014).
Country Risk	The importer country might face risk from the government regulations. War and terrorism is some of the reasons that might cause risk to the importers (Armstrong 2015). There are many country that regulate transfer of money
Transport Risk	There may be risk of the commodities when there is movement of goods from seller to buyer. The importers they can cover their risk through insurance (Rimmer 2015)

The reason for the emergence of the risk for exporters and the importers:

Inflation rate: When there are changes in the inflation in the country, there would be changes in the exchange rates also (Bowen, Hollander and Viaene 2012). With lower inflation rate in a country there will be appreciation of the currency in the other country. While slow rate of inflation will lead to rise in the prices of goods. Currency value increases with the when there is low inflation in the country and vice versa (Lutz 2015).

Changes in the Interest rate: With interest rate changes there is changes in the dollar exchange rate and has an effect on the value of the currency (Ravenhill 2013).

Balance of Payment: BOP of country help in reflecting the BOT and earning from FDI. When there is excess of imports over exports then there is exchange rate fluctuations, which affects both the importers and the exporters trading (Ivey and Davidson 2015)

Government Debt: Risk is also generated when there is government debt. When there is government debt within the country then there is a possibility for the foreign investors to sell their bonds in the open market. This will lead to fall in the value of exchange rate (Hinze, Jaszi and Sag 2013).

Recession: When there is recession in a country then the rate of interest is likely to fall this would not allow the country to accumulate capital. This leads to weakening of the currency with respect to the other currency, which would lower the exchange rate (Gagné 2014).

The following are the risks and mitigations for Exporters of Australia:

Risks	Ways of mitigation
Currency Risks	A discussion can be made by the importers with the Treasury Specialist who helps in managing of risk through solutions of currency risk management (Rimmer 2014). Seeking financial advice regarding carrying out of currency transaction and availability of financial products so as to eliminate risk (Kelton 2013).
Delivery Risk	There is a need for considering conditional method of exports like the export documentary collection or letter of credit as an export documentary (Hinze, Jaszi and Sag 2013)
Credit Risk	It is important to know about the status of the trading partner i.e. United States through a credit reference agency Building a solid bond with the trading partner United States  The exporter needs to request the bank for assistance so that reports can help in identifying the potentialities of the trading partners. This is also helps the exporters to be informed  about the bona fide buyers The exporters of Australian Bega Cheese should consider using of the Atradius or the Export Finance and Insurance Corporation( EFIC) so that the exporter can recover when there is default in the payment mode of the trading partner the  United States  The nonpayment risk can be reduced by the exporters when they consider Export documentary of Letter of Credit or Export Documentary collection
Transfer Risk	Obtaining an insurance with export credit insurer like the Atrdius and EFIC Consulting with the Australian Trade Commission for getting information about the market for which the exporter trades Dealing with trading partners with stable political environment or unforeseen government regulation risk which reduces restriction of the foreign payments
Country Risk	Country risk can be insured by the exporter through Atradius and EFIC Getting knowledge from Austrade to understand the knowledge of market of the importer Exporters will try and deal with importers with a stable political background
Transport Risk	Exporter need to ensure the goods with its claim payable in Australia Exporters of Australia need to consult with the insurance brokers, commercial marine insurance agencies so that there is insurance against any risk from transport. Obtaining of advice from the independent broker specialising in international transport

The following are the risks and mitigations for Importer (United States):

Risks	Ways of mitigation
Currency Risks	The importers they can discuss about their needs the Treasury specialist who will help in managing of risk through the currency management solution (Faunce 2015).
Non Delivery Risk	Seeking of the trade references before there is a contract with the new trade partner If there is an agent in the supplier country then prior speculation can be done before good gets shipped Arrange inspection of the goods by an acceptable independent inspection agency (this can be costly)
Credit Risk	When importing of the goods is considered then there is a need for an Import documentary Letter of Credit (Thurbon 2013) Import documentary letter of credit is one of the effective ways through which payment is facilitated to the supplier with some in built safeguard.
Transfer Risk	Taking help of the trading commissions to understand about the market of the trading partner (Thurbon 2013)
Country Risk	There is need to consult with the trading commission in the country so that additional information can be received about the exporters country
Transport Risk	Insuring  of the goods with its claim in the United States Consulting with insurance brokers to know about insure against risks (Faunce 2015). Engage a freight forwarder or obtain independent advice from an insurance broker specializing in international transport

References

Armstrong, S.P., 2015. The economic impact of the Australia-United States free trade agreement.

Australia.gov.au. (2016). australia.gov.au. [online] Available at: https://www.australia.gov.au/ [Accessed 6 Apr. 2016].

Blakeney, M.L., 2014. The Pacific Solution: Australia and Negotiation of the Trans-Pacific Partnership Agreement (TPPA). University of Western Australia Law Review, 37(2), p.123.

Bowen, H., Hollander, A. and Viaene, J. (2012). Applied international trade. Houndmills, Basingstoke, Hampshire: Palgrave Macmillan.

Faunce, T.A., 2015. How the Australia-Us Free Trade Agreement Compromised the Pharmaceutical Benefits Scheme Australian Journal of International Affairs 2015; Doi: 10.1080/10357718.2015. 1048785. Faunce TA How the Australia-US Free Trade Agreement Compromised the Pharmaceutical benefits Scheme Australian Journal of International Affairs.

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