Avila Howell posted an update 1 week, 6 days ago
When speaking about foreign exchange prices, what the majority of men and women envision is that the exchange rate between two currencies. However, there are different things that are included within this exchange rate. In economics, an exchange rate suggests that the rate where particular currency is being traded with another. More importantly, it’s also a measure of how much one country’s currency is worth in contrast with another country’s currency. For instance, an interbank exchange rate involving a number of major banks in the united states and Japan indicates the dollar exchange rates have been two US dollars for every single Japanese yen.
In economic terms, the foreign exchange rate between two currencies is quite important. However, exchange rate could just be a part of the whole picture. That is because when the home currency increases, then you would also expect the overseas currency to rise. But this isn’t always the case. For instance, when the Chinese currency was weakening against the US dollar, many business companies, particularly those manufacturing products to the western market, were concerned that their business might suffer because the orders from their customers could fall.
To prevent this kind of circumstance, financial institutions frequently use foreign exchange rates as a base for their decisions. And it worked, for a while. However, if the situation changed and also the Chinese market started to rebound, their business started to flourish. At precisely the same time, another countries that have a significant trade surplus with China also became interested in buying the Chinese industry. In this manner, foreign direct investment (FDI) in China climbed as more foreign companies established operations in China.
In addition to this, there is another side of the story as well. In
buy naira in the US were to go up, the currency of the country which has a surplus across the other country would appreciate. And this could have very negative consequences for the country having the deficit. 1 example of this could be the American market, which was formerly a high-acidity country and now has a rather substantial international debt.
A similar effect could occur in the European Union (EU), the largest common trading currency in the world. If the euro strengthened versus the dollar, this would definitely benefit European businesses which operate in the United States. But if the euro weakened versus the dollar, this could obviously have a negative impact on European businesses that operate in the USA. The outcome would be greater imports of goods and services at the U.S., reduced exports to Europe and possibly lower overall economic growth.
Some analysts believe that the European Central Bank (ECB) might follow a fixed exchange rate regime for several years. But this remains to be seen. For the time being, the prudent strategy is to continue to allow the values of the various currencies move in their free markets.