Exchange Rates Affecting Trade

Exchange rates are defined as the rate by which the currency of one country gets exchanged with one another. It is defined as the value of currency of one country in relation to another one and are often determined in the exchange market of foreign trade. Imports and exports are the two different staples of international trade. There exists a complicated relationship between the trade and the exchange rates as there rises a feedback loop among them. The exchange rate can directly affect the surplus of the trade which in turn again affects the exchange rate and this goes by in a loop. More the domestic currency becomes weaker; it helps in stimulating the export while making the imports more expensive. On the other hand, a strong domestic exchange rate hampers the exports while making te imports more cheaper. Exchange rate plays an important role in a country’s performance in trade platform. The relationship between trade and exchange rates directly relates to the rate of volatility. The rate of exchange directly affects the international trade pertaining to misalignment of currency. The international trade is directly driven by the import prices. The rate of exchange increases the competitiveness of export and import in the trade sectors. The ways by which exchange rates affects the business trades can be divided into transactional, translational and liquidity risks. Within all these categories, the impact of exchange rates can be seen.

Interrelation between interest rates, exchange rates and international trade

Higher the interest rate within a country, more the value of country’s currency increases offering lower rate of interest.  Interest rates significantly affect the exchange rates fluctuations. An increase in the rate of interest increases the home currency deposits. On the other hand, higher the interest rate, mote it tends to attract the foreign trade investments which automatically increase the demand for country’s exchange rates. A country’s economic growth directly balances the trade as well as its interest rates influencing the value of the given currency. The leading economic indicators of a country help in determining the exchange rates of the country which pre-dominates the variable and the subject to change. Country’s interest rates are regarded as the overriding factors that help in determining the demand of currency. On the other hand, exchange rates are relative. In a world where virtual currencies have intrinsic values, the only value that a country’s currency could have is the perceived value which is relative to the currency of the other countries based on their domestic purchasing power. For example if the import rate of country A is higher than the export rate of country B, then it is determined that the country A, incurs a trade deficit with a combined effect of the current depreciation making the overall import of the country more expensive and competitive.  This situation also leads to the rise in inflation resulting in the reduction of the purchasing power, increase in the rate of interest and making borrowing more expensive.