International Trade:
Weaker domestic currency makes exports affordable
Stronger currency may hinder export competitiveness
Export and Import Prices:
Fluctuations impact prices of imported and exported goods
Depreciation raises the cost of imports, contributing to inflation
Inflation:
Changes in rates influence prices of imported goods
Import-driven inflation prompts central bank adjustments
Interest Rates:
Connected with exchange rates
Adjustments influence rates and attract foreign capital
Foreign Direct Investment (FDI):
Exchange rates influence attractiveness for foreign investors
Stable currency encourages FDI, while a depreciating one may attract investments
Debt Servicing Costs:
Increased costs for countries with foreign debt
Repayment in foreign currency rises with a weakening domestic currency
Consumer and Business Confidence:
Stability fosters confidence
Volatility or devaluation creates uncertainty impacting decisions
Tourism:
Exchange rates influence travel costs for international tourists
Weaker currency may attract more foreign tourists
Employment and Economic Growth:
Fluctuations impact overall growth and employment
Changes influence competitiveness of domestic industries, affecting job creation or loss
Balance of Payments:
It affects a country’s economic relationship with the world
A trade deficit or surplus affects the value of the domestic currency
A guide to the impact of exchange rates on the economy
International trade: Growing exports and balancing competition
Exchange rates have a direct impact on a country’s global competitiveness. A weaker domestic currency makes exports more affordable to foreign buyers, potentially increasing outsourcing. Conversely, a strong currency can impede export competition, potentially creating trade imbalances.
Exports and Import Prices: Fluctuations and Relationships to Price Trends
Fluctuations in the exchange rate directly affect the prices of imports and exports, leading to inflation. A depreciation of the domestic currency raises the price of imported goods, which can affect inflation.
Benefit: To connect the dots between rates and exchange
The interconnectedness of exchange rates and interest rates is crucial. Central banks may adjust interest rates to influence exchange rates and control inflation. Higher interest rates can attract foreign capital seeking better returns, potentially strengthening the domestic currency.