When doing business abroad, SMEs and startups are vulnerable to exchange rates fluctuation. It can have an effect on competition. Changes in the foreign exchange rates can affect the cost of supplies that are purchased from another country and the attractiveness of a product or service to foreign customers.
Why do exchange rates change?
The Foreign Exchange Rate is "the price of one country's currency in terms of another country's currency". It will change with the laws of supply and demand. This means that one currency in an exchange rate pair will appreciate (increase in value) and the other currency will depreciate (decrease in value) when people buy more of the former and sell the latter.
What are the key factors that influence FX rates?
1. Interest rates and inflations
Changes in interest rates are seen as a main driver of exchange rates. Higher interest rates attract foreign capital and cause the exchange rate to rise. On the other hand, lower inflation will help a country become more competitive; therefore, the exchange rate is most likely to appreciate as its purchasing power increases relative to other currencies. Countries with higher inflation typically see depreciation of their currency.
2. Government influence
The government can regulate exchange rates. By buying or selling foreign currency in the market, a country can artificially change, manipulate or keep the official exchange rate at a certain level. In China, the exchange rate is fixed and the government directly controls it.
During a recession, a country’s exchange rate will most likely depreciate due to the fall in interest rates.
4. Political stability
The political stability of a country has the power to influence currency exchange rates. For example, Brexit undermined international confidence and increased uncertainty in the British economy, which led to a weaker British pound. Since the announcement of Brexit, the British pound continues to trade below its pre-Brexit level.
Investors purchase more of a country’s currency when its value is expected to rise to make a profit in the future. As a result, the value of the currency rises due to an increase in demand. On the other hand, if a country’s currency is expected to depreciate, investors will sell, which results in the value of the currency decreasing.
While large corporations have stronger bargaining power and have alternative banking solutions available to them, the options for SMEs are very limited. They struggle to find affordable and efficient conversion tools and global payment systems. TranSwap offers a simple and powerful solution.
With TranSwap, you get to take control of your foreign exchange (FX) exposure. The FX market is volatile and risky. With a multi-currency global account, you can easily convert and hold the currency when the exchange rate is in your favour. As a business owner, you spend less time worrying about currency fluctuations and unreasonable conversion fees. Instead, spend more time on growing the business and gaining an upper hand in managing foreign exchange volatility.
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