Final answer:
To preserve margins in response to a strengthening euro relative to the dollar, the European global company should reduce prices in dollars. This maintains competitiveness in the U.S. market and prevents overpricing due to currency conversion gains. When the euro weakens, they should raise dollar prices to maintain profit margins.
Step-by-step explanation:
The question relates to how a European-based global company should adjust its pricing strategy for goods exported to the U.S. market, given fluctuations in exchange rates between the euro and the dollar over time. Considering the exchange rates provided, when the euro strengthens against the dollar, it means that the same amount of euros will convert to more dollars, increasing the revenues in euro terms for a European-based company when the sales are dollar-denominated.
Therefore, to preserve margins when the euro strengthens against the dollar, the European-based global company should reduce prices in dollars. If they maintain or increase dollar prices, their products may become too expensive in the U.S. market, potentially reducing demand. Conversely, when the euro weakens against the dollar, the company should consider raising prices in dollars, to maintain its euro-denominated margins.
Using a practical example, if a French firm incurs €10 million in costs, and sells its products in the United States for $10 million. When the euro is stronger, such as an exchange rate of $1.48/euro, the firm would get more euros back for its $10 million in sales (€6.756 million). But when the euro is weaker, such as $0.99/euro, the firm would receive less euros back (€10.1 million). Therefore, adjusting prices accordingly is essential to maintain profitability in the face of changing exchange rates.