How do exchange rates affect businesses

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Reveal answer up. S trong. W eak. P ound makes. I mports. C heaper but. Business Class. Business Class Are you looking for the latest trends and insights to fuel your business strategy? Business Size Large Small - Medium. American Express. Summary How do exchange rates affect businesses? But with new opportunities come new risks. Effects of exchange rates on business The effects of exchange rates on your business can impact how competitive you are domestically and abroad.

Effects of exchange rate fluctuations While international growth can offer new opportunities, it also comes with its own challenges. A multidimensional risk The speed at which exchange rates shift is increasing over time. How can businesses minimize their exposure to exchange rate risks? In addition, further tightening of monetary policy at a time when the domestic currency is already strong may exacerbate the problem by attracting hot money from foreign investors seeking higher yielding investments which would further strengthen the domestic currency.

However, there are times when currencies move in dramatic fashion and the reverberations are felt around the world. We list below a few examples:. A prime example of the havoc caused by adverse currency moves is the Asian Financial Crisis , which began with the devaluation of the Thai baht in summer of The devaluation occurred after the baht came under intense speculative attack, forcing Thailand's central bank to abandon its peg to the U.

This currency contagion spread to neighboring countries such as Indonesia, Malaysia and South Korea, leading to a severe contraction in these economies as bankruptcies soared and stock markets plunged. Between and , China held the renminbi steady at about 8. In , China responded to the growing chorus of complaints from the U. It allowed the yuan to steadily appreciate , from over 8.

The Japanese yen was one of the most volatile currencies between and Because of Japan's policy of near zero-bound interest rates , traders favored the yen for carry trades , in which they borrowed yen for next to nothing and invested in higher yielding overseas assets. But as the global credit crunch intensified in , the yen began appreciating sharply as panicked investors bought the currency in droves to repay yen-denominated loans.

The euro recovered its strength over the next year, but that only proved temporary. Here are some suggestions to benefit from currency moves:. US-based investors who believe the greenback is weakening should invest in strong overseas markets, because your returns will be boosted by foreign currency gains. For U. The U. Earnings of U. This has admittedly not been a pressing issue since , as U.

When that happens, investors who are tempted to borrow in foreign currencies at lower interest rates should remember those who had to scramble to repay borrowed yen in The moral of the story: never borrow in a foreign currency if it is liable to appreciate and you do not understand or cannot hedge the exchange risk.

Adverse currency moves can significantly impact your finances, especially if you have substantial forex exposure. Currency moves can have a wide-ranging impact on a domestic economy and globally as well. When the greenback is weak, investors can take advantage by investing overseas or in U. Because currency moves can be a potent risk when one has a large forex exposure, it may be best to hedge this risk through the many hedging instruments available.

Bank of Canada. Board of Governors of the Federal Reserve System. Accessed Jan. Corporate Finance.