2018 has been a year of currency fluctuations, with most prominent Asian currencies like the Indian Rupee, Pakistani Rupee and the Philippines Peso, depreciating against the greenback, at alarming rates over a course of the year. Agreeably, the depreciation of a currency is concerning for the country in question; however, the far-reaching impacts associated with currency fluctuations are often overlooked.
Currency fluctuations arise from the floating exchange rate system, which is followed by most major economies. The exchange rate of currencies against others depends on various factors such as relative supply and demand for currencies, economic growth of countries, inflation outlook, capital flows, and so on. As these factors are constantly changing, currencies fluctuate with them. The fluctuation of a country’s currency can have a far reaching impact on the country’s economy, consumers, businesses and remittance inflows. Let’s take a closer look at some of these dynamics.
One of the most prominent impacts of currency fluctuations can be seen in international trade. Generally, a weaker currency stimulates exports and makes imports expensive, thus decreasing the country’s trade deficit in the long run. On the other hand, a strong currency can reduce exports and make imports cheaper, effectively widening the trade deficit. While it is generally assumed that a strong currency is a good thing for a nation’s economy; in reality, it might not be. An unjustifiable strong currency can cause a drag on the economy over the long term, as entire industries are rendered uncompetitive and thousands of jobs are lost. As GDP is directly linked to exports, a weaker currency may actually help the country’s economy, contrary to popular belief. On the other hand, a depreciating currency can result in inflation as the cost of importing goods increases. Currency fluctuations also have a direct impact on the monetary policy of a country, as exchange rates play a vital role in deciding exchange rates set by a country’s central bank.
Currency fluctuations have a significant impact on the consumer. As mentioned above, a weak currency increases the cost of imports and eventually, this cost is borne by the consumer. On the other hand, a strong currency allows consumers to buy more. This increased spending further benefits the overall economy of the country. Gas prices are also affected in a big way due to currency fluctuations. When the US dollar strengthens against other currencies, we see a dip in oil prices. To decode why that happens, it’s important to know that major oil exporting countries like Saudi Arabia have their currencies pegged to the US dollar. So, when the greenback gets stronger, so does the Saudi Riyal, making Saudi Arabia’s imports cheaper. Due to this, Saudi Arabia can afford to charge lower prices for oil. With oil prices affecting the cost of commodities worldwide, consumers can directly feel the effect of these inter-linked fluctuations.
Currency fluctuations affect all kinds of businesses, but businesses that export or import supplies from other countries are most severely affected. A change in currency can have a direct impact on a business’s bottom line. Even if a business does not buy or sell to other countries, these fluctuations can have some unforeseen consequences. For instance, if a company uses trucks to move its products and a currency change fluctuates the cost of fuel, there will be a direct impact on shipping costs. On the other hand, a depreciating currency can also help domestic businesses sell more locally, by reducing the country’s imports.
Expats who send money back home on a regular basis, keep a constant eye on exchange rates, since they stand to benefit or loose from any fluctuation. When a country’s currency weakens, its expats in other parts of the world get more value on their money transfers; and we can see a rise in inward remittances to the country. Being a preferred money transfer brand for millions of expats around the world, Xpress Money witnesses a direct impact of these fluctuations. Some expats go to the extent of taking loans to make the most of the exchange rates. In turn, an increase in remittance inflows helps the country’s economy by enabling its citizens to spend and invest.
Currency fluctuations have an impact on almost every aspect of our lives, even though we may ignore the link. Understanding how it all works can help you take the right financial decisions at the right time.