| Mohamed Med |
11-05-2017 01:59 PM |
currency exchange
The currency price of one country gets stronger and/or weaker against another country’s currency on a daily basis, but what exactly does that mean for those who don’t trade in the forex market? Currency exchange rates affect travel, exports, imports and the economy. In this article, we’ll discuss the nature of currency exchange and its effect on people and the economy. Before delving into the topic in more detail, we must first establish a constant; for demonstration purposes we will be talking about the relationship between the euro and the U.S. dollar. More specifically, we will be talking about what happens to the U.S. economy and to the economies of Europe if the euro trades markedly higher against the U.S. dollar. The assumption we will be making is that US$1 will purchase 0.7 euros. The Impact on Travelers If US$1 buys 0.7 euros, U.S. citizens will be more reluctant to travel across the pond. That’s because everything from food to souvenirs would be more expensive - about 43% more expensive than if the two currencies were trading at parity. This is an illustration of the effect of the purchasing power parity (PPP) theory. The impact that this scenario would have on corporations (particularly large multi-nationals) is a little more complex because these businesses often conduct transactions in a number of different currencies and tend to obtain their raw materials from a wide variety of sources. That said, U.S.-based companies that generate the majority of their revenue in the U.S. (but that source their raw materials from Europe) would likely see their margins take a hit on higher costs. 55251
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