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FOREIGN EXCHANGE RISKS AND ADVANTAGES​

These strategies can help you to save big on currency fluctuations & minimize risk

Currency Fluctuations are natural occurring outcomes in an economy. It is the most important thing to be considered for many economies. Daily currency fluctuations are common in every Foreign Exchange market. Due to currency fluctuations, several activities in the market get affected.

The global Currency market is very dynamic and volatile. It can change rapidly and significantly impact traders, business people and investors. Lack of attention and indecision can affect business people leaving them at a halt. Numerous factors influence currency fluctuations. This blog is about currency fluctuations, the economy, business and how these effects companies etc. can get a quick idea by reading this.

What causes currency fluctuations?

In simple words, currency fluctuations are based on supply and demand. Most currencies in use today are traded using flexible exchange rates, meaning their value changes according to supply and demand in the foreign exchange market. There are numerous factors influencing currency fluctuation:

  • Country’s Monetary Policy: This policy is a mechanism by which a country ensures its price and currency stability. The National Central Banks make adjustments on interests and procedures on the same. The inflation rate is influenced by monetary policy and the interest rates set by central banks, which impacts currency swings. A weaker currency makes every trading activity, like imports, exports etc., more expensive. It can also contribute to the nation’s trade surplus and deficit. When business people increase their borrowing and spending, it leads to a period of economic growth.
  • Interest & Inflation Rate: In simple terms, Inflation is the rate at which the price of goods and services increases. A little inflation is expected, but too much Inflation undermines economic stability. Increasing costs for goods shows the weakness of the currency. A currency’s value may eventually drop globally due to a decline in its purchasing power, representing a loss in the actual value of the medium of exchange inside an economy.
  • Politics & Economy: Broader political and Economic activity affects currency fluctuation in a country. Investors seek predictability and stability; political instability can seriously harm investment flows because they are considered safer places to invest. Strong economic indicators and high consumer confidence increase a nation’s currency demand.
  • Trade Movements: Any change in the trade movements, namely imports or exports, can affect currency fluctuations. When imports outpace exports, there is a greater demand for foreign money, which causes the exchange rate to shift against the nation and vice versa.
  • Banking Operations: The majority of foreign exchange dealers are banks. They offer draught sales, money transfers, letters of credit, take on arbitrage, accept foreign bills of exchange, etc. These operations influence the supply and demand for foreign currency, which impacts exchange rates.
  • Stock Exchange Operations: The exchange operations demand foreign funds, and the exchange rates affect currency fluctuations. It includes the granting of loans, the payment of interest on foreign loans, the repatriation of foreign capital, the purchase and sale of foreign assets, etc.

How do Currency Fluctuations Affect Businesses?

Business activities, mainly imports and export, are one of the main things affected by currency fluctuation. These businesses need to pay attention to the exchange rates as these are highly sensitive. Changes in currency rates are important for domestic industry, too, since they will indirectly affect the overall economy.

  • Selling Overseas: Selling the products overseas and issuing invoices in foreign currency is vulnerable. Issuing invoices in the local currency may have a lesser impact. Prices may become uncompetitive due to the variation in the exchange rates.
  • Buying Overseas: These are also vulnerable to currency fluctuations. Here, the amount gets changed due to the fluctuation at the tie of the due date. Due to these fluctuations, some businesses put forward contracts to fix exchange rates, which helps reduce the risks.
  • Indirect Impact: Even if you don’t buy or sell goods or services abroad, the currency rate fluctuations might indirectly affect your firm. The increased fuel cost in the country you are selling or buying is a good example of an indirect cause due to currency fluctuation.

The Impact of currency fluctuations

The economy, consumers, enterprises, and remittance inflows of a nation can be significantly impacted by changes in its currency. Accordingly, depending on the sector, the value of a country’s currency will have both positive and negative effects on that country’s economy. Some of the very common ones are:

  • The Economy: The economy is the first prominent thing affected by currency fluctuation. In general, a weaker currency encourages exports and makes imports more expensive, depending on the sector, reducing the country’s trade imbalance. However, a strong currency may cause exports to decline and imports to become more affordable, increasing the trade deficit. A strong currency can drag on the economy, while a depreciating currency can cause Inflation.
  • The Consumer: All types of businesses are impacted by currency changes, but those exporting or importing goods from other nations are the most severely affected. Changes in currency may directly impact the financial results of a company. Even if a company doesn’t buy or sell to other nations, these swings may have some unanticipated effects. Smaller businesses that lack backup finances often go for contracts with fixed exchange rates.
  • International Remittances: Remittances can benefit not only individuals but also the economy. Expats keep a close watch on currency fluctuations. They are both positively and negatively affected by the changes. When a nation’s currency declines, its citizens living abroad receive a higher value for their money transfers, which leads to an increase in remittances into the country.

Should Currency Volatility Influence Investment Strategy?

Currency Volatility often seeks media attention. It doesn’t mean investors should take a quick decision. Investors should approach exchange rate movements by lowering portfolio currency risk rather than viewing them as boosting returns.

US Dollar is regarded as the safest reserve currency. US Dollar serves as the currency asset for investors with highly volatile assets. But for investors with a long-term perspective, attaining variety involves looking at the foreign exchange market as a whole rather than just the dynamics of a particular currency pair. The movement of currencies across global markets is taken into consideration in a portfolio that is properly diversified.

Epilogue

Even though we sometimes ignore the connection, fluctuations in foreign exchange rates affect practically every area of our lives, from the highest levels of government to the smallest article of clothes we import. Making the appropriate financial decisions at the proper time might be aided by understanding how everything operates.

Fluctuations happens every second. The currency market never sleeps. Always look to the fluctuation rates if you are a regular customer of sending money. It acts as the primary medium between domestic and international markets for a variety of commodities, services, and financial assets. We can compare the costs of goods, services, and assets quoted in various currencies using the exchange rate.

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