In a globalised world, exchange rates can significantly impact businesses of all sizes. An interconnected economic system has resulted in currencies that fluctuate daily, and that instability can be hugely disruptive when you're trying to forge a path towards sustainable growth.
However, being aware of exchange rates and the advantages and disadvantages that come with them can be very beneficial. So - how do exchange rates affect businesses?
In this article, we'll take you through the nuts and bolts of exchange rates and answer that question.
What are exchange rates in business?
An exchange rate is the rate at which a currency can be changed into another at a given time. These rates fluctuate regularly and are calculated through various external factors, such as interest rates, economic activity speed, and market supply & demand.
These fluctuations occur constantly due to the global nature of the financial market, moving up, down or staying the same minute by minute. For example, if you are based in the UK and want to convert £100 (GBP) into Euros (EUR) with an exchange rate of 1.20, you will receive €120.
Fixed and floating exchange rates
There are two types of exchange rates in the global marketplace:
What is a fixed rate?
A fixed (sometimes called 'pegged') exchange rate is when the government or central bank sets the rate against a major world currency (such as the US dollar). Fixed rates fluctuate less significantly than floating rates and are more commonly used by developing countries.
What is a floating rate?
In contrast to fixed rates, a floating exchange rate is determined by the free market, depending on supply and demand. This is the most common and globally used exchange rate type and is often seen as naturally self-regulating. Major powers and developed nations are most likely to use a floating exchange rate for their currency.
Why should you keep an eye on exchange rates?
As a company that operates globally, keeping track of exchange rates in business is essential, as they can significantly impact the cost of supplies from other countries. Additionally, fluctuating exchange rates will have a part to play in customer behaviour overseas. These two fundamental outcomes make monitoring the respective country's exchange rate against your respective trading currency crucial.
What are the advantages of exchange rates for business?
For small business owners looking to expand globally, the concept of exchange rates can seem unclear, daunting and challenging. However, while exchange rates can undeniably bring disadvantages, the advantages are numerous.
In short, a fixed exchange rate helps:
Reduce FX-based risks in international trades.
Provide more certainty for importers and exporters.
Allow businesses to explore new markets with exotic currencies.
Give companies the confidence to plan for global growth.
Exchange rates help countries with smaller economies continue to build their financial structures and open new market opportunities. This is a win-win for businesses operating globally and developing new economies.
What are the disadvantages of exchange rates?
Those are the positives - now for the negatives. While exchange rates can open global markets and enable smoother trade with developing nations, some critical disadvantages come with exchange rates that business owners should be aware of.
A fixed exchange rate can:
Conflict with macroeconomics
Require higher interest rates
While some of these disadvantages aren't necessarily within your control, they can still harm the health of your business. That's why ensuring you are up to date with the current economic climate is vital for the future. When done well, it can inform your entire growth strategy moving forward.
What are the effects of exchange rates on businesses?
So - how does the exchange rate affect business? Whether you're a large or small company trading on the global financial market, the exchange rate will undeniably impact your international performance. Here are just a few of those effects:
Without the ability to compete with domestic and international rivals, any business will face an uphill battle. If you rely on global imports, fluctuating exchange rates that swing out of your favour could harm your price competitiveness, helping to give your rivals the upper hand. In contrast, changing rates in your favour could also make you more competitive in your specific market.
Changing exchange rates will also impact the economic performance of companies in other countries - trickling down to have negative consequences on supply chains. If your business relies entirely on international supply chains, keeping a firm eye on the changing economic status of the relevant country is crucial. If your supply chains suffer from the market, this will have a clear economic effect.
Imports and exports
Import and export levels are one of the more obvious effects of exchange rates on global businesses. As the balance of trade swings, the value of currencies fluctuates. For instance, a country with a high demand for goods will likely export more than import. This means their money is more in demand, improving its position against other currencies. When your company imports and exports, it's worth considering this information.
How do businesses reduce exchange rate risk?
Those are the effects, but how do you minimise the foreign exchange risk? There's a variety of ways to do this, which include:
Staying informed and reacting to change.
Having a robust currency strategy.
Using an expert FX solution
When pulled together, all of these points could positively impact your place in the international market. Using a company that provides you with an easy-to-use, expert FX solution is the big first step. That's where 3S Money come in.
An expert FX solution you can trust
3S Money isn't any old financial institution. We're an EMI (Electronic Money Institution) and part of a new breed of fintech companies looking to make the financial lives of businesses worldwide more efficient and productive.
We have our very own live FX desk, which allows our clients to take advantage of excellent FX rates when moving money between accounts and operating internationally. This can be invaluable when you're looking to streamline your financial processes.
What are the benefits of signing up with 3S Money?
That's an easy one. In contrast to the bureaucratic, restrictive nature of traditional banking, a 3S Money business account is a tool designed specifically for modern business. Our goal is to help you save money on foreign exchange, all with an easy-to-use and efficient business account. The benefits of working with 3S Money are numerous, but here are five of the best reasons to sign up:
Immediate access to over 65 currencies.
Local IBANs and US account details for all clients
A dedicated Client Manager for your account.
Bank-beating FX rates: saving you money on high-value transfers.
A quick and easy application process with same-day approval.
In the modern age, global banking shouldn't be difficult. With a 3S Money International Business Bank Account, it's easy. Our account is specifically designed to streamline your business's finances, unfurling a world of global trade that may not have been available. When operating in an internationally connected world, this is indispensable.
Are you looking to level up the international growth of your business? We've got you covered. Our application process couldn't be more straightforward - simply check your eligibility and receive pre-approval in minutes.
Exchange rate FAQs
What businesses are affected by exchange rates?
Fluctuating exchange rates will directly impact any business that imports or exports goods. However, companies can still be affected indirectly by changing exchange rates.
How does exchange rate volatility affect businesses?
Exchange rate volatility affects businesses in various ways, including an increase in the price of goods and, in turn, lower demand. In contrast, exchange rates can swing in a business's favour if the cost of goods falls.
Is a strong exchange rate good for business?
Yes - a strong exchange rate is generally good for businesses, particularly those that operate internationally. A favourable exchange rate will lower the cost of goods for those importing.
How do interest rates affect foreign exchange?
If interest rates are high, there is a bigger chance that foreign capital will be attracted, increasing exchange rates and a stronger currency.