INDIRECT IMPACTS OF EXCHANGE RATES
We are only familiar with the direct impacts of foreign exchange rates, but, there is more to that. The indirect influence of exchange rates and its fluctuations goes beyond several significant aspects of our lives.
Products from other countries are common, or even more common, than those produced locally. Exchange rates create a substantial impact on the prices being paid for imported goods. A weaker domestic currency signifies the price for foreign products will increase significantly. Conversely, a stronger domestic currency may reduce the prices of imported products up to a certain amount.
The change in the price of foreign goods varies on how the currencies of the exporting countries, or the country of origin of these products, have fared against the local currency. In April 2015, the US dollar prevailed versus its major counterparts. But then again, several currencies had various performances against the greenback, making cross currency more complex.
Exchange rate can also impact an investment portfolio substantially, may it be local or foreign investments. For instance, a firm US dollar normally dwindles global demand for commodities since these are priced in dollars. Lower demand can affect earnings and valuations for local commodity producers, although a weaker local currency can mitigate its negative effect. On the other hand, a firm currency can affect sales and profits generated abroad. The effect of exchange rates on portfolio returns is given. Securities valued in appreciating currency can bolster total returns, while instruments priced in a declining currency can lower total returns.
A weakened local currency fuels economic progression by bolstering exports and making imports more costly. Faster economic growth is normally tantamount to better job prospects. But a strong local currency can slow down economic growth and curb employment prospects.
It can also affect inflation and interest rates, which in turn impact savings and loans. A strong currency weighs down inflation and exerts a drag to tighten monetary policy. This may the press central to keep or reduce interest rates. On the contrary, a weak currency can increase the inflation rate in a country that is a big importer. It is because of higher prices for importer products. This might prod the central bank to raise rates in order to surpass inflation and support the currency, preventing it from plummeting. Therefore, exchange rate has a direct influence on the interest rate paid on a mortgage or loan or received in savings or money market account.
When it comes to property and housing prices, an undervalued domestic currency can be similar to having an open-ended Black Friday sale, and what is discounted is each product, service, and asset in that nation. But, here’s the catch: those who can pay in the stronger foreign currency obtain the sale price. However, it also gains foreign buyers seeking cheap assets and surpassing local buyers for them. Foreign buyers have boosted housing prices in countries with a softened currency. High housing prices and low supply impact rent, too.
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