Nowadays, business transactions become more and more complicated due to the interdependence between different economic segments. The currency exchange rate is one of the definers of the relationships and goods exchange in the international arena. The concepts of supply and demand and market equilibrium determine a value of a particular currency in international transactions while not only having a critical impact on economic relationships between international players and enabling trade but also affecting the overall condition of the national economy.
In the first place, there is a strong correlation between inflation and the currency exchange rate. Inflation implies a rapid increase in prices for goods and services, and these changes reduce the purchasing power of the currency in the foreign exchange market while the currency exchange rate also defines the intensity of inflation. This instability triggers a gradual rise in inflation rates causing a continuous decline in aggregate demand and provided a well-developed rationale for the government to pay attention to this economic factor.
It is evident that central banks of countries consider all the elements of the international economy including the currency exchange when developing a well designed monetary policy and interest rates. Along with that, it assists central banks in managing foreign currency reserves and growth of the market. All these steps are critical since they help respond to economic changes promptly and avoid adverse consequences. Often, central banks use interest rates as a financial tool, as increasing them will limit the growth pace while decreasing them will support active lending and economic development. In this instance, a strong domestic currency will play a similar role since it will limit the actions of national producers due to its attractiveness to importers. It will intensify competition in the market and set high-quality standards and entry barriers for domestic manufacturers. Having a strong currency for an extended period may be destructive for the economy, and decreasing interest rates may become a requirement.
As it was depicted earlier, the currency exchange rate has a critical impact on international relations and trade. In the first place, the value of the currency itself presents the laws of supply and demand, as it is dependent on both curves and speculations in the market.
Having a strong or weak currency defines whether the country is more suitable for imports or exports. This approach helps understand potential profits to be acquired in the case of export or import activity. In this case, a country with a strong currency will be highly suitable for imports. For example, Switzerland with its high value faces economic instability and cannot rely on exports On the contrary, the weak currency will be beneficial for exports. A combination of these factors states that the value of the currency will define the actions of the companies in the market while high levels of import may result in the intensified rivalry and negatively affect the national economy.
Overall, it could be said that an immense impact of the currency exchange rate cannot be underestimated since to some extent, it determines the curves of supply and demand, defines the company’s position in the international arena, and can organize a transition from one economic cycle to another. Along with that, monitoring the currency exchange rates can be viewed as a favorable platform to control inflows and outflows of cash and attract FDIs, as these attributes can be regarded as key definers of the national growth. In the end, a combination of these factors provides a clear rationale for the fact that the government purposefully utilizes an array of mechanisms to modify the currency exchange rate in the desired way.
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