In monitoring the global foreign exchange (FX) market, we noted an important development the week of 23 March.
- The US Dollar (USD) strengthened in a significant way against some of the world’s most traded currencies.
- The British Pound (GBP) fell to multi-year lows against the USD (and the EUR). Additionally, the value of the Mexican peso, Australian dollar, and Brazilian real all dropped in a meaningful way.
- Other benchmark currencies, such as the Japanese yen and Swiss franc, also weakened to a lesser extent against the USD.
This current level of volatility is atypical and mainly driven by the impacts that COVID-19 is having on the global economy. This volatility has a variety of impacts on your employees on foreign assignments depending on their situation.
Sudden changes to exchange rates can pose challenges for companies and their mobile employees on foreign assignments. Employees paid in home country currency who need to exchange funds into the host country for local purchases are directly impacted by these fluctuations. Typically, their cost of living allowance (COLA) or goods and services differential will adjust over time, but in most cases, is not reflective of real-time FX rate levels.
For US outbounds, where the USD has strengthened against the host currency, the allowance will go down; for US inbounds, the inverse is true.
The following diagram indicates the impact on COLA as the USD strengthens against a host currency (e.g., the GBP):
This second diagram indicates what happens when the Home Country Currency weakens compared to the host country (e.g., UK-based assignee in the US):
As this is a very sensitive time for those on international assignment, your organization may want to consider monitoring both indicators more closely. Exchange rate movements have the potential to affect your assignee pay as well as determining company strategies to mitigate that impact. Disruptions caused by an ill-timed update could have effects on the assignee’s morale and motivation.