The Weak Dollar and Franchise Values

The US dollar has depreciated significantly against other currencies over the past several years. Currency depreciation has a differential effect on an economy. For example, manufacturers who export their products abroad benefit, as their goods are cheaper in foreign markets, while manufacturers who purchase raw materials from abroad are hurt because they face higher input prices. US citizens living abroad who get paid in some foreign currency also benefit from a weaker dollar (not that I know anything about that.)

Currency exchange markets seldom affect the sports world. North American professional sports leagues that have teams in both the US and Canada are one exception to this. Canadian-based NHL, NBA and MLB teams have to pay their players in US dollars. In the 1990s, when the Loonie was trading under seventy cents to the dollar, Canadian NHL teams struggled financially, as their payroll costs were significantly higher than US based competitors. A number of Canadian teams moved to the US, and the Canadian government considered subsidizing Canadian NHL teams.

The financial environment is quite different now. The chart below shows the Canadian dollar-US dollar exchange rate over the past five years. The Loonie has been trading roughly at par with the US dollar since last fall, and some analysts predict that this exchange rate will persist for some time.

A recent New York Times article points out that the value of Canadian NHL teams surged in the latest Forbes franchise value estimates, and that Canadian NHL teams appear to be attractive purchases for foreign investors. These events are not surprising, given that Canadian NHL teams have seen their payroll costs drop significantly relative to their US competitors.