December 8, 2021

Have businesses been impacted by forex?

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Given that the forex market is a vast global entity that sees a huge amount of money traded on a daily basis, it should come as no surprise that the sector has a significant impact on the business realm.

This has been borne out during the coronavirus pandemic, although much has been lost as businesses have continued to suffer from a wider economic downturn and decline in demand.

But how exactly have businesses been impacted by the forex market and currency price movements? Let’s find out:

#1. The Exchange Rate and its Impact on Businesses

Currency pair prices are governed in most instances by a free-floating exchange rate, except in instances where one currency is pegged to the value of a major alternative (such as the Euro or US dollar).

This exchange rate is itself influenced by a sweeping range of macroeconomic factors, from the base interest rates set by individual nations to fluctuating levels of inflation.

From a business perspective, the exchange rate associated with certain currency pairs has a direct impact on the cost of buying and selling goods, especially for ventures that source materials from overseas or those that sell into international markets.

If you’re a buyer, prices can soar when the exchange rate changes, while the compounding impact of inflation can also drive incremental growth in a relatively short period of time.

#2. Low Interest Rates and Diminished Capital Inflows

We touched earlier on base interest rates, which are usually set by the central banks in individual countries across the globe.

Typically, base rates are slashed during times of economic tumult and decline (such as the coronavirus pandemic), which in turn minimises currency values and diminishes capital inflows from overseas in the form of Foreign Direct Investment (FDI).

This creates a lower global demand for specific currencies and can lead to weaker governance and economic growth, which in turn impacts directly on businesses, real-time demand and sentiment in certain markets.

#3. Inflation and the Changing Cost of Living

If a currency is devalued over time by factors such as low base interest rates, this can result in ‘imported’ inflation for countries and businesses that are substantial importers.

For example, a sharp 20% decline in the domestic currency could result in imports costing as much as 25% more, which directly impacts operational costs and has a sharp impact on a business’s bottom line.

Clearly, inflation has a direct impact on importers and the cost of doing business cross-border, and this shouldn’t be ignored when looking to create a viable and profitable commercial model.

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