Exchange rates are ever fluctuating due to economic and political factors including inflation, industrial production, and global events.
As such, you need to understand how to deal with the impact of currency exchange rates. You should also know the best ways to mitigate the risks posed by increasing foreign currency exchange rates, as they affect both the currency value and your business in numerous ways.
What Factors Affect Foreign Exchange Rates?
The foreign exchange rate plays a meaningful role in the economic stability of any country. If you’re planning to do business overseas, you must pay attention to foreign currency exchange rates. The market may often fluctuate as per the prevailing market forces of supply and demand.
Some of the factors affecting foreign exchange rates are inflation rates, interest rates, government debt, speculation, recession, and political stability. For instance, the UK’s political instability has had a notable impact on the value of the British pound, particularly in international markets.
Moreover, the perpetual Brexit unrest has impacted the value of the currency in diverse ways, causing amongst others the GBP/USD Flash-Crash of 2016. However, the pound prediction after Brexit shows that the pound’s value may rise in the coming months.
How Can Foreign Currency Exchange Rates Affect Your Business?
1. Commodity price
The US dollar is the most traded currency worldwide. Most of the valuable products in the world are priced as per the US dollar. These include items like oil, gold, copper, and other precious products and metals. If you trade in these products, then you have to pay in US dollars.
However, if your country’s currency is weak against the dollar, you’ll be forced to pay more for products or raw materials. And this means that you’ll have to increase the cost of your products or services, which lowers your competitive advantage.
2. Supplier payments
When you engage an overseas supplier in your business, you welcome different currencies and variations of exchange rates. If the currency used in your country depreciates, this can also affect the supply chain. On the other hand, when the currency appreciates, its value strengthens, and you end up paying a lesser amount for the supply of business materials.
3. Foreign currency conversion fees
Your business may incur some charges when converting currencies after sending or receiving money. This is due to the reason that banks charge a fee on converting foreign currency rates. For instance, sending money to countries that don’t use the world’s renowned currencies can come with substantial rates. In most cases, banks utilize an intermediary bank amidst your transaction, and when the banks lack links with the receiving country, the rates may be considerable.
Not all banks charge conversion rates for all currencies, however. Modern banks such as Transferwise and Monzo stand out for their low, or even lack of conversion charges.
Exchange Rates: A Force to Be Reckoned With
The exchange rate plays a vital role in companies that import and export raw materials and products to other countries. Currency depreciation can make exports cheaper and benefit exporting companies. It’s critical to understand the effects of such currency changes on product prices, as it will help in determining the expected profit from the sale of your goods.