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Currency variations are normal occurrences in the foreign exchange system. The rate of exchange of a given currency over another is controlled by several essential and technical aspects (Cavallo, Neiman, & Rigobon, 2014). Such factors encompass the demand and supply of the involved currencies, interest rate differential, economic status of the country, and inflation among others. Since such aspects are always in a state of perpetual instability, the value of currencies keeps fluctuating (Chen & Juvenal, 2016).
Though the influence of a currency’s gyrations on the economy is extensive, many businesspersons do not pay close attention to the rate of foreign exchange as their businesses are carried out entirely using a domestic currency. For most consumers, foreign exchange rates only become relevant for infrequent activities or practices such as foreign travels and imports.
A misleading notion that many people have is that the appreciation of a domestic currency is good as it makes a country able to pay for imports. The truth is that an overly strong currency may result in a considerable drag on the economy if it is prolonged (Caselli, Chatterjee, & Woodland, 2017). This is because many industries could be made uncompetitive and some exporters may consider leaving the business because of making low profits. Nevertheless, though customers may find a weak domestic currency objectionable for making imports expensive, it could have economic benefits as exporters and local traders could make huge profits. In this aspect, the appreciation and depreciation of domestic currencies have both indirect and direct effects on economic variables.
For instance, fluctuations in the value of the domestic currency may affect the interest rate payable on mortgages, returns on investment, and the cost of products in a local store to mention a few.
Caselli, M., Chatterjee, A., & Woodland, A. (2017). Multi‐product exporters, variable markups, and exchange rate fluctuations. Canadian Journal of Economics, 50(4), 1130-1160.
Cavallo, A., Neiman, B., & Rigobon, R. (2014). Currency unions, product introductions, and the real exchange rate. The Quarterly Journal of Economics, 129(2), 529-595.
Chen, N., & Juvenal, L. (2016). Quality, trade, and exchange rate pass-through. Journal of International Economics, 100, 61-80. Web.