Navigating Forex Volatility and Tariff Policy: Strategic Imperatives for Corporates and Private Equity Funds
Written By
Andrew Parker
EVP, Head of Global Treasury Management
In an era of mounting policy uncertainty marked by shifting tariff targets and increasing geopolitical friction, foreign exchange (FX or forex) rate volatility has reemerged as a critical risk factor for corporates and private equity (PE) funds engaged in cross-border operations and mergers and acquisitions (M&A).
Recent rhetoric around renewed tariffs on goods from Asia and Europe, coupled with diverging monetary policies globally, has introduced considerable currency risk and pricing asymmetry into international deal-making.
To protect foreign profits, assets and returns, corporates and funds alike must adopt a more integrated and anticipatory approach to FX risk management.
FX Risk Is No Longer a Passive Exposure
For years, low FX rate volatility and stable central bank coordination allowed multinational firms and investment funds to de-emphasize forex exposures. Today, however, sharp swings in the euro, yen and emerging market currencies against the U.S. dollar — driven by divergent rate paths and tariff speculation — are having a material impact on EBITDA, valuations and exit multiples. Corporates with overseas operations must now reassess how to proactively identify and hedge translation, transaction and economic exposures. PE funds, too, must consider FX risks not only during diligence and acquisition but also throughout the portfolio life cycle, especially for deals in countries where tariffs may distort input costs or throw off repatriation strategies.
Cross-Border M&A Faces New Complexity
Cross-border M&A is uniquely vulnerable in this climate. Volatility in the FX market can distort deal pricing, create post-close integration challenges and erode investment theses. Sellers may seek to price in local currency terms, while buyers must translate that into their functional currency — a move that often introduces unwanted basis risk. Meanwhile, tariffs on intermediate goods can affect synergy assumptions or working capital needs across supply chains.
To address this, acquirers should engage treasury and risk management teams early in the deal process to model currency scenarios and hedge accordingly. Pre-close hedging strategies, such as FX forwards, options or collars, can protect bid value while preserving upside. Moreover, it’s vital to quickly implement a post-close policy for managing FX volatility to protect against ongoing exposures during integration.
Uncertain Tariff Policy Demands Agile Capital Planning
Tariff impact on currency exchange is particularly dangerous when policy shifts are sudden or politically driven. For corporates, this demands a reevaluation of capital allocation strategies, especially for capital-intensive investments abroad. Financing foreign subsidiaries with local-currency debt, revisiting intercompany pricing models or pre-positioning inventory in tariff-prone zones can help absorb sudden valuation shocks.
PE funds face a different but no less important calculus. When assessing deals in tariff-sensitive industries, such as industrials, consumer goods or tech hardware, funds must layer geopolitical risk into their valuation models. Scenario-based modeling should capture potential tariff escalations and FX devaluations, while exit strategies may need to consider dual-listing or geographic divestiture options to preserve optionality.
Recommendations for Resilience
When it comes to FX risk management in an uncertain tariff environment, corporates and PE funds have several strategies at their disposal. The following steps can establish resilience, regardless of policy fluctuations:
- Institutionalize FX risk governance: Corporates and PE funds should elevate forex volatility to a board-level or investment committee concern, with regular scenario analysis embedded in strategic planning.
- Integrate treasury early in M&A: Currency risk assessment should be done in the early stages of diligence, not after deal execution. Evaluate pre-hedging instruments in tandem with legal and tax structuring.
- Develop dynamic hedging policies: Move beyond static hedging ratios and adopt a dynamic approach to forex risk management — one that is responsive to market triggers, monetary divergence and tariff updates.
- Leverage technology and analytics: Utilize modern treasury and risk platforms to simulate FX-tariff interactions and guide proactive hedging instead of reactive protection.
- Engage policymakers and industry groups: Participate in trade associations to stay ahead of tariff proposals. The goal should be to understand how those tariffs might affect exchange rates and collectively shape the regulatory dialogue.
Preparing for the Tariff Impact on Currency
In today’s fluid global environment, FX volatility and trade policy cannot be treated as exogenous shocks. They are embedded structural forces reshaping how corporates and PE funds must operate internationally. By approaching FX risk management as a strategic capability — not a compliance necessity — organizations can safeguard assets, protect profit margins and execute M&A with greater confidence, even amid unpredictable tariff tides. Whether you’re sorting out your strategy for your private equity portfolio or uncertain how to hedge against the impact of tariffs on your overseas operation, Banc of California can help. Learn more about FX risk management with our international banking services.
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