Consultancy tips for Foreign Exchange Nightmare!!!
- Eddie Asmar
- Nov 16, 2016
- 2 min read
Ever wonder what losses international companies face each year from foreign exchange? Currency fluctuate every second of the day and international companies need to exchange their domestic currency in order to purchase goods & services.
Every country currency is regulated by its central bank they are the ones who decide to fix the domestic currency to the US dollar or to float it. Taking such decision helps in managing the balance of trade.
The factors that affect the currency makes are major one:
Inflation rate
Interest rate
Current account deficits
level of public debt
Ratio of exports to imports
Political & economic conditions
Without forgetting the supply and demand for a specific currency can trigger it to depreciate or appreciate against the US dollar. When there is a lot of demand for US dollar this will cause the dollar to appreciate against other currents & vice versa.
Inflation rate is the factor that makes the domestic currency of the related country to depreciate against the US dollar. When inflation raises it will cause prices to raise causing the currency to weaken.
Interest rate another factor that makes the currency to appreciate, raising interest rates makes the currency to appreciate. When the interest rate raises, the demand for currency increasing where people start exchanging the foreign currency for the domestic currency that makes it appreciate.
Current account deficit when this figure is published by the government the currency is affected, a high figure makes the currency to depreciate.
Level of public debt this figure has the same consequence as the above factor, when there is a high level of public debt this will create an unfavorable effect on the currency.
Ratio of exports to imports this is related to the level of imports to exports. When exports exceed imports this will create a favorable image for the currency and vice versa.
Finally political and economic condition this factor is as easy as it comes, a good condition will create a good side effect on the currency. This figure moves directly proportional to the currency.
Our financial consultancy team provides you with these tips on how to manage the risk is associated with the foreign exchange. Hedging through forward contracts, currency swap agreements & currency options.
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