How Foreign Exchange Affects The Economy

Consumer prices

The prices of all imported products are directly affected by foreign exchange movements. In many countries a significant proportion of consumer goods are imports.

Wholesale prices

Staples and raw materials, from food to oil and metals, are major imports and therefore also subject to fluctuating prices due to foreign exchange developments.

Inflation

The pricing of imports will have a marked effect on inflation levels.

Export industries

The behaviour of the home currency in international markets is an important factor in determining the competitiveness of exports.

For instance, if a currency is overvalued, the price of that country's goods overseas will be relatively expensive, exports will suffer and jobs in export industries could be lost.

Domestic economy

All of the factors mentioned above can affect domestic developments.

Investor confidence

Patterns of savings and investments in the domestic economy can be greatly influenced by the degree of domestic and international confidence in the home currency.

Monetary policies

The pattern of international money flows (in or out), and to a lesser extent central bank interventions, may have a strong influence on the money supply, and therefore on monetary policies.

Interest rates

A change in monetary policies for the reasons shown above may result in changes in prevailing interest rates. For example, the desire to control inflation may lead to an increase in interest rates.

Leisure and tourism

Patterns of tourism are directly affected by currency fluctuations. When a country's home currency becomes strong, it becomes expensive for visitors.

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