U.S. companies with international operations are capitalizing on favorable euro rates to reduce debt funding expenses and offset the impact of rising interest rates through hedging strategies. This trend is anticipated to grow if the Fed halts rate reductions while other central banks do not follow suit, as reported by bankers and corporate advisors.
The demand for cross-currency swaps, a risk management technique involving the exchange of loan principal and interest payments between currencies, has been steadily increasing due to diverging interest rates between the U.S. and other major economies.
According to John Wahr, head of rates sales in the derivative products group at U.S. Bank, there has been a rise in new cross-currency swap transactions and restructuring of existing hedges, notably USD to EUR flows related to net investment hedging activities.
Companies commonly resort to cross-currency swaps to take advantage of positive carry and shield against volatility stemming from global economic uncertainties, such as potential effects from President Donald Trump's trade policies on inflation, interest rates, and the U.S. economy.
In January, monthly EUR/USD cross-currency swap volumes increased by 7% to $266 billion compared to the same period in 2024, as per data from Clarus. However, names of participating companies were not disclosed due to confidentiality reasons.
Trump’s policies, including tariffs and trade disputes, have raised concerns about inflationary pressures, prompting companies with international exposure to manage currency risks to stabilize cash flows. One effective tool is the net investment hedge, which helps counterbalance fluctuations in the value of foreign investments caused by exchange rate variations.
By converting dollar interest payments into euro payments using cross-currency swaps, companies can reduce interest costs by nearly 200 basis points, translating to significant savings. Companies have utilized these savings for debt repayment and other corporate purposes, as highlighted by industry experts.
While attractive from an interest rate and currency perspective, companies cautiously approach cross-currency swaps to avoid potential losses due to currency fluctuations, noted industry professionals.
Despite the uncertainty in monetary policies, companies are exploring hedging opportunities with exposure in multiple currencies for risk mitigation, seizing the current market conditions as a strategic advantage.