Given the present state of international commerce and cross-cultural exchange, currency conversion forms the bedrock of the international financial system.
Owing to how vulnerable domestic economies are to even the most minute change in international affairs, currency conversion often plays a crucial role in determining the quality of life of a given population.
Our blog this week takes a look at how foreign exchange bears an impact on factors such as overseas travel, inflation, and multiple other areas. Keep reading to find out!
Depending on the strength of a given country’s currency conversion rate, the price and value of good and services tend to vary.
With regard to imports, a stronger currency will mean that the prices of these goods and services prove to be much cheaper for local citizens. Here, individuals are able to buy more for less and, thereby, enjoy higher levels of consumer surplus.
This also increases purchasing power and drives down inflation rates, which remains a persistent issue for many countries at present. Inflation refers to the increase in the weighted average prices of goods and service in a given economy. High levels of inflation bear a strong effect on interest rates – higher the inflation, higher the interest rates.
These developments can seriously slow down an economy and produce a slew of ripple effects, which prove to be highly detrimental. These will be explored in the sections below.
In an economy with a weak currency, inflation and interest rates are generally quick to increase. In this regard, wages are a factor that is highly affected, albeit in an indirect way.
While it may take some time to bear effect, currency conversion bears a very tangible pinch on an individual’s salary and in extreme cases, their employment as well.
Here, high-interest rates increase the cost of loans, mortgages, and even business investments, which can lead to reduced spending and a higher cost of borrowing. All of these factors together can stunt economic growth. High currency conversion rates can, therefore, result in lower wages and higher unemployment rates in extreme cases.
Gas and groceries
Some of the most essential goods in terms of day-to-day activity include gas and groceries. In countries with a strong currency, imports including the oil for gas becomes cheaper, increasing an individual’s purchase power. Moreover, it also allows individuals to save and improve their quality of life in the long run.
In countries such as this, economies tend to perform better, albeit at a slight cost to the employment sector. How so? The section below explores why.
Funnily, when it comes to employment and a country’s exports, having a strong currency can often prove to be a little less than ideal.
A strong currency usually means that local produce and exports become more expensive, which can result in unemployment and a poorer balance of trade. This is because higher wages increase the cost of production, resulting in higher prices in terms of goods and services and a greater cost for employers.
Further, when imports are cheaper than local produce, suppliers at home face lower demand, which can have harsh effects, especially in agrarian communities. Further, demands for goods and services abroad plummet, given the availability of cheaper options elsewhere.
The cost of overseas travel is highly dependant on favourable currency conversion rates as well.
When the local currency is performing well in the global market, spending abroad becomes very much more affordable.
Thus, when it comes to planning trips and tours, looking into exchange rates is an important part of the budgeting process. While it is always beneficial to travel at a time when the local currency is performing well, certain money transfer companies can peg currencies at certain rates, so even if market rates are unfavourable, buyers can ensure that they still enjoy peak currency values.
When it comes to currency conversion, many everyday aspects hinge on this all-important factor.
With globalisation at record levels and international trade and commerce more robust than ever, keeping up with foreign exchange is a necessary part of everyday life. Whether you’re making a significant investment on behalf of your company, carting your next online purchase or planning a holiday abroad, this factor is more important than ever.
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