How Does The Currency Market Affect The International Trade?

How Does The Currency Market Affect The International Trade?

29 Nov 2019 02:16 PM
 

What causes forex market fluctuations?

The forex market is highly volatile, wherein the participation of various entities such as commercial banks, forex traders, hedge funds, central etc., from all over the world make up a daily trading volume of over $5 trillion. Foreign currencies are bought and sold in the forex market by individuals or corporations depending upon their needs and goals and for various purposes ranging from currency hedging to online forex trading. The far-reaching impact of the foreign currency exchange rate fluctuations reaches all the forex transactions irrespective of their scale, whether it be international trade, overseas money transfer, or currency exchange for overseas travel. What's the reason behind forex market volatility and changes in the exchange rates? 

The economy, businesses, consumers and remittances of a country are widely influenced by the currency fluctuations and, thereby, the movements of the forex rates. The appreciation and depreciation of the currency and the various driving factors such as inflation, interest rates, current account, geopolitical condition, economic condition, and terms of trade collectively create an impact on a country's economy and, ultimately, the scenario of international trade. 

Effects of exchange rates on the economy:

The most prominent impact of currency fluctuations can be seen in international trade, wherein a depreciating currency stimulates exports by making it relatively inexpensive and hampers import by making it expensive. This works towards decreasing the country's trade deficit, whereas on the other side, an appreciating currency can harbour opposite outcomes, with imports becoming cheaper and exports expensive, effectively widening the trade deficit.  

However, contrary to popular beliefs, a stronger currency might not always facilitate a national economy to witness a boom as it can cause a drag on the economy by rendering the industries uncompetitive and thus increased unemployment. On the contrary, a weaker currency can foster the growth of a country's economy with boosted exports and GDP, which is directly linked to it. 

Balance of payments – Current account deficit refers to the situation where a country's imports exceed its imports. In this scenario, decreased value of the currency can boost exports due to it becoming inexpensive and reduce imports shrinking or offsetting the current account deficit. 

Inflation rates - One of the major determinants of exchange rates is inflation, wherein a country with low inflation might witness an increase in the value of its currency compared to others, whereas high inflation in countries can severely hamper the purchasing power of its citizen and the value of its currencies, thus witnessing a fall in the exchange rates.  

Interest rates- A country with higher interest rates witnesses foreign investment and cash inflows in its economy, causing an increased demand for its currency and the currency's value will rise with it. In contrast, a country with a lower interest rate might not be attractive to foreign investors leading to cash outflows, and the exchange rate will drop.

Currency fluctuations impact on businesses

  1. Direct Effects
    Suppose there is appreciation in the domestic currency. In that case, the prices of goods and services become expensive in the local market as compared to the overseas market and depreciation in the domestic currency implies that the prices of goods and services become cheaper in the local market than in the other countries. This is how changes in the exchange rates directly influence the prices of goods and services. 
  2. Effects of depreciation on businesses:
    Depreciation of the local currency and lower exchange rates positively impacts the exporter engaged in exporting goods and services due to higher demand for their products in the global market and ultimately boosted sales. It enables exporting companies to boost their profit margins by increasing the prices of commodities while keeping the same operational costs. In contrast, depreciation of the local currency negatively influences the companies engaged in importing business due to imports becoming expensive, and the only resort to counter the situation is a rise in their prices, impacting the local market negatively. 
  3. Effects of appreciation on businesses:
    Appreciation in the currency turns the table between exporting and importing companies than what is observed for the case of a depreciating currency. Former will be negatively affected as their products will be at higher rates as compared to other competitive countries leading the global market to export from other countries. On the other hand, import companies are positively affected as they'll be able to import raw goods at much better prices.
  4. Indirect effects:
    At times, businesses are affected by exchange rates even without directly involved in importing and exporting goods. For instance, if you ship goods around the country using delivery trucks and the cost of fuel is raised due to changes in the exchange rate, you will end up paying more for your shipments to be delivered. Exchange rate volatility can also affect competition. Depreciation of your local currency makes the cost of importing goods more expensive, which could lead to reduced import volumes. Domestic companies should benefit from this as a result of increased sales, profits and jobs.
  5. Foreign currency conversion fees: 
    When companies make international payments, they have to pay foreign currency conversion rates to the banks or financial institutions on a premium basis. The fees are mandatory whether the payment is being sent or received. The fee is highly affected by the change in exchange rates and can rapidly become very costly.
  6. Foreign exchange impacts : 
    For international trade, the impact of the exchange rate is far-reaching on international trade, which might not come to the limelight for irregular or occasional transactions like overseas remittances, travel for health or education, etc. However, the influence of the forex market's volatility and the movements of the forex rates can be effectively understood for overseas trade by considering the long trade cycles and the forex rate fluctuations the transactions are exposed to in the interim. The values of the payables and receivables of a company can go up and down due to the forex rate fluctuations and affect the corporation's bottom line having significant dealings with foreign currency. 

It's crucial to have proper knowledge and understanding of how the currency market affects your businesses, especially when you are involved in international trade. Myforexeye is your one-stop destination to get updates on live forex rates and forex markets. Our expert team's guidance can improve your understanding of the forex know-hows and enhance security against forex risks and savings from forex transactions with services like transaction process outsourcing. Especially when it comes to fortifying your business from exchange rate movements to protect your profits, the right forex risk management strategy can go a long way, provided by our Dr Forex service with hedge recommendations and research-based forex reports. 

Conclusion

Myforexeye is your destination to get all your forex needs resolved, whether it be individual or organization and irrespective of their scale. Our Specialized team is armed with advanced technology and the expertise of experienced professionals to provide convenient solutions that simplify forex for you while dispensing important information and quality research. Our user-friendly web portal and mobile app reinforced by our transparent streamlined process and service empower users to make savings and insight into real-time rates and best quotations from banks to equip you with the best possible options. One can also mitigate their forex risks through our expert consultation and risk advisory services available on a transactional basis and available whenever the need for it arises.

Speak to one of our specialists to acquire a detailed understanding of Myforexeye forex services.

Disclaimer- The website is to provide information only.

 

 

 

Recommended for you...