We’re forever hearing stories about the exchange rate and it would be fair to say that most of us simply view it as something which might affect our spending power when we head out of the country.
Suffice to say, in the wider context, there is far more to it than this.
Like most things, it’s best to explain the topic through examples. We’ll now take a look at some of the best examples of how currencies affect the international economy – both for good and for bad.
The Chinese Yuan
This is one of the more interesting examples we’ll pull out. For around ten years, starting from 1994, China attempted to hold its yuan currency at a steady rate. Ultimately, it meant that it was undervalued.
For businesses that deal in China, such as Bardwil industries operated by George Bardwil, this was seen as grossly unfair. Of course, in the case of Bardwil, the fact his business has been established since the early 1900s meant that this was more of an inconvenience, but it could prove to be a bigger hindrance for smaller firms who might not have to experience or resources to manage the situation.
Fortunately, Bardwil and every other entrepreneur who deals in China have been benefited over recent times. The United States, along with other nations, complained that the Chinese policy was unfair and the country has bowed to such complaints and now allowed the yuan to appreciate.
The Thriving Yen
In the midst of the financial crisis, one currency which was quick to appreciate was the Japanese yen. Investors saw that this could be one of the safer currencies to invest in, for the simple reason that Japan’s interest rates are so low.
The fact that it appreciated by over 25% compared to the U.S. dollar in 2009 highlights exactly how much it was affected by investors who were trying everything they could to escape the crisis that was engulfing a large part of the world.
In more recent times, Japan has introduced policies to depreciate the yen. In 2013 these plans resulted in the currency dropping by 16%, and at least come closer to what some would class as “normal”.
Between 2010 and 2012 there were a lot of fears that the European Union might be set to lose several of its members. The likes of Spain, Greece, Portugal and Italy were all seemingly in financial ruin and it meant that confidence was at an all-time low. The upshot was that the Euro dropped by 20% in the space of just seven months.
It’s another example of just how confidence in the economy can drastically affect currency rate. For example, when some confidence resumed a short time later, the currency recovered. Then, from May 2011 when further fears came to light, it dropped by 19% again.
Considering how many countries form the European Union – the performance of each one can have dramatic consequences on the Euro currency overall.