To have a better understanding of how exchange rates affect companies, it is primarily important to understand the factors that affect currency value. While there are many factors that cause currency fluctuations, interest rates, and economic growth are two of the main reasons.
What Influences Exchange Rates?
- Interest rates. Currencies are directly affected by interest rates. The higher the national interest rate, the stronger the local currency. Higher interest rates naturally attract foreign investments, which leads to growing demand and an increase in the value of the local currency. High-interest rates promote the flow of money into a country and strengthen the currency value.
- Economic growth. A strong economy is always the backbone of a strong currency. In a country that is blessed with strong and steady economic growth, the central bank usually raises interest rates to cope with inflation because higher interest rates affect the local currency.
With these main factors in mind, you will have a better understanding of how exchange rates can affect your business. Below are some areas on which your business could be affected.
How Changes in Exchange Rates Impact Business
- Balance sheet. The effects of exchange rates can be serious for corporate finance directors. Loans, assets, and liabilities all have to speak the same financial language, while the moodiness of exchange rates is an additional hurdle. Financial reports are carefully checked and, at the same time, represent an essential building block for any company that wants to be taken seriously.
- International trade. This scenario shows most clearly to what extent exchange rate fluctuations can have a major impact on companies. The export of goods overseas means that the cost of manufacturing the goods is calculated in a different currency than the one in which they are sold. If two currencies are in the supply chain, your company could make big profits, but it could also make big losses.
- Fuel Costs. Everyone is affected by fuel costs, but they are not just relevant to your household budget. If a country imports fuel from abroad, a change in the market exchange rate can adversely affect the entire economy and, as a result, affect domestic companies. The devaluation of a national currency goes hand in hand with an increase in transport costs, which means that the transport of goods is directly affected.
- Tourism. Although currency devaluation is generally seen as a bad sign of a country’s economy, companies can benefit indirectly from it. Tourism is a prime example of how currency devaluation affects companies. Countries like Greece, Cyprus, and Spain concentrate a significant part of their respective economies on tourism. As soon as their currencies are devalued, they immediately become a popular destination for travelers, tourists get more for their money. If you change your money into the local currency, you can afford first-class accommodation, food, and general leisure activities.
- Mergers and acquisitions. Companies are assets. Like every asset, they have their price. In times when the local currency is devalued, companies are devalued and thus become optimal candidates for mergers or acquisitions.
As a final thought, the fluctuation in the exchange rate directly impacts many companies both locally and abroad. It is also, in this context does Forex trading works. You can get more information about the Forex market and Forex trading from a good broker like the Pepperstone. Want to know more about them? Read the Pepperstone review from WeCompareBrokers.