Strong Currency and Weak Currency in International Exporting Company
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Strong Currency and Weak Currency In International Exporting Company
Currency is strong if its value is appreciating in relative to the other country’s currency. A currency is weak if its value decreases in relative to the other countries’ currencies (Huerta, 2018). Currency fluctuations impact all businesses across the globe, but the company that import or export experience huge impacts. A fluctuation in the country’s currency can directly impact the business bottom line. For instance, if a firm based in the United States anticipates a profit margin of $ 5 million annually, its margin would reduce to $ 4.5 million if its currency depreciates or weakens.
An international exporting company would prefer a weaker home currency. Weaker currency stimulates stronger exports. A weak currency will increase output and revenue simultaneously (Huerta, 2018). The weak currency enables the company’s export to gain market share since its goods will be less competitive. The increase in sales volume not only increases profit margins for the company exporting goods abroad but also enhances economic growth and employment. The companies seeking to improve their exports globally encourage weak currency in the home country.
If the currency gains value or appreciates, it will result in a decrease in domestic demand. Imports become cheaper, while exports become less competitive (Pettinger, 2017). For an international exporting company in slow economic growth, the strong currency will further worsen the economic growth. A strong currency weakens or deteriorates the company’s current account. Some of the companies have discovered they are uncompetitive in foreign markets because the currency in their home countries is too strong to match the relative price for exports. And since these countries cannot allow their currencies to weaken, it resulted in current account depreciation.
Essentially weak currency redistributes the purchasing power from individuals who hold fixed incomes, assets, currency in cash and the fixed assets in the form of currency to individuals who hold assets denominated in a different currency. In a typical country with functioning currency, most individuals payments and savings are denominated in local currency. For instance, if China weakens Yuan, it implies that the products and services produced abroad will be expensive to individuals with and are paid in Yuan, thus discouraging the individuals from importing. Weakening Yuan will also mean that locally will be very competitive and fetches higher prices abroad, thus encouraging producers to abroad. The two cases result in net export.
In conclusion, currency fluctuations impact all business, but exports and import companies suffer huge consequences. Weakening the currency or devaluation means reducing the value of the currency relative to other countries currency. A strong currency is the nation’s money whose value appreciates or is more than other country’s currency. Weakening the currency depreciates its value. Residents in the home country find foreign travels and imports very expensive. However, the international exporting companies will accrue a lot of the benefits since their exports are cheaper in the foreign market and attracting more demand. Weak currency stimulates higher aggregate demand and higher exports and can result in employment and economic growth in the home country. Weak home currency can enable the company to restore competitiveness without impacting aggregate demand.
References
Huerta, A. (2018). Mexico: Strong currency and weak economy. Contemporary Post Keynesian Analysis. https://doi.org/10.4337/9781845423650.00016
Pettinger, T. (2017, October 29). Problems of a strong currency. Economics Help. https://www.economicshelp.org/blog/3457/currency/problems-of-a-strong-currency/