What happens When Exchange Rate Increases

What happens When Exchange Rate Increases.The foreign exchange market moves through a world of expectations about the future value of currencies. This situation generates changes in the exchange rate of various currencies

Exchange Rate Effects;What happens When Exchange Rate Increases.

What happens When Exchange Rate Increases.

Changes in Prices:

Il is changes in the relative price levels that cause changes in the • •<<himgc rate. Suppose the price level in Britain rises relative to the US pm r level. This will lead to the rise in the price of British goods in terms nl pound. British goods will become dearer in the US. On the other hand, lli< American goods become cheaper in Britain and their imports into llniain increase. So the demand for dollars will increase. So the exchange i uh- is established at higher level from the point of view of the US. It implies appreciation of ‘he value of the dollar and depreciation of the \ line of (he pound.

Change in Exports and Imports:

The demand and supply of foreign exchange is also influenced by • Ii.mges in exports and imports. If exports of the country are more than imports, the demand for its currency increases, so that the rate of exchange moves in its favour. Conversely, if imports are more than exports, the demand for the foreign currency increases and the rate of exchange will move against the country.

  1. Capital Movements:
  • Short-term or long-term capital movements also influence the exchange rate. Capital-flows tend to appreciate the value of the currency of the capital-importing country and depreciate the value of the currency of the capital-exporting country. The exchange rate will move in favour of the capital-importing country and against the capital-exporting country.
  1. Influence of Banks:

Banks also affect the exchange rate through their operations. If the commercial banks issue a large number of drafts and letters of credit on foreign banks, the demand for foreign currency rises. The bank rate also influences the exchange rate. If the bank rate rises relative to other countries, more funds will flow into the country from abroad to earn high interest rate. It will tend to raise the demand of the domestic currency and the exchange rate will move in favour of the country.

  1. Influence of Speculation:

The growth of speculative activities also influences the exchange rate. If the speculators expect a fall in the value of currency in the near future, they will sell that currency and start buying the other currency as they expect to appreciate in value. Consequently, the supply of the former currency will increase and its exchange rate will fall. While the demand for the other currency will rise and its exchange rate will go up.

  1. Stock Exchange Influence:

If the stock exchanges help in the sale of securities, debentures, shares etc. to foreigners, the demand for the domestic currency will rise on the part of the foreigners and the exchange rate also tends to rise. The opposite will be the case if the foreigners purchase securities, debentures, shares, etc. through the domestic stock exchanges.

  1. Structural Influences:

Structural changes are those changes, which bring changes in the consumer demand for commodities. They include technological change, innovations, etc. Such structural changes tend to increase the foreign demand for domestic product. It implies increase in exports, greater demand for domestic currency, appreciation of its value and rise in the exchange rate.

  1. Political Conditions:

If there is political stability and the government is strong and efficient, foreigners will have tendency to invest their funds into the country. With the inflow of capital, the demand for domestic currency will rise and the exchange rate will move in favour of the country. On the contrary, if the government is weak, inefficient and dishonest, and there is no safety to life and property, capital will flow out of the country and the exchange rate will move against the country.

What Happens When Exchange Rate Increases?


In today’s globalized economy, exchange rates play a crucial role in international trade and the overall health of a country’s economy. When the exchange rate of a currency increases, it can have significant implications for various sectors and individuals. In this article, we will explore the effects of an exchange rate increase and its impact on businesses, consumers, and the economy as a whole.

The Impact on Businesses:

When the exchange rate of a currency increases, it can have both positive and negative effects on businesses. Let’s take a closer look at these impacts:

  1. Exporters:
    When the exchange rate increases, it becomes more expensive for foreign buyers to purchase goods and services from a country. This can lead to a decline in exports as prices become less competitive. On the other hand, if the local currency is strong, businesses may benefit from higher profits when converting foreign earnings back into the domestic currency.
  2. Importers:
    An increase in the exchange rate can be beneficial for businesses that rely heavily on imports. With a stronger domestic currency, the cost of importing goods and raw materials becomes relatively cheaper. This can result in cost savings for businesses and potentially lead to higher profit margins.
  3. International Investments:
    An appreciation in the exchange rate can also impact foreign investments. When the local currency becomes stronger, it can lower the returns on investments made in other countries. This may discourage investors from putting their money abroad, which can have implications for capital flow and economic growth.

The Impact on Consumers:

Exchange rate increases can affect consumers in several ways. Here are a few key points to consider:

  1. Purchasing Power:
    When the exchange rate of a currency increases, it typically leads to higher prices for imported goods and services. This can reduce the purchasing power of consumers, making imported products relatively more expensive. On the flip side, if a country relies heavily on exports, a stronger currency can lower the cost of imported goods, benefiting consumers.
  2. Travel and Tourism:
    Exchange rate fluctuations can significantly impact the cost of travel and tourism. A stronger domestic currency can make it more expensive for locals to travel abroad, while it can make the country more attractive for foreign tourists, as their currency will stretch further. This can have implications for the tourism industry and overall economic growth.

The Impact on the Economy:

The impact of an exchange rate increase on the economy as a whole depends on several factors. Here’s how it can play out:

  1. Inflation:
    A higher exchange rate can lead to lower inflationary pressures in an economy. When the cost of imported goods decreases due to a stronger currency, it can help keep inflation in check. This is particularly beneficial for countries that heavily rely on imports.
  2. Current Account Balance:
    An increase in the exchange rate can lead to an improvement in the current account balance. A stronger currency makes exports relatively more expensive, which can lead to a decrease in the trade deficit. This can have a positive impact on a country’s overall economic stability.
  3. Employment:
    Exchange rate fluctuations can also have implications for employment levels. A stronger currency can make exports more expensive, which can potentially lead to a decline in demand for domestic products. This may result in job losses in export-oriented industries. Conversely, a weaker exchange rate can boost demand for exports and contribute to higher employment.
    In conclusion, an increase in the exchange rate can have wide-ranging effects on businesses, consumers, and the overall economy. While the impact may vary depending on the specific circumstances of a country, it is important to consider both the positive and negative implications of exchange rate fluctuations. Being aware of these effects can help businesses and individuals make informed decisions and adapt to changing economic conditions.

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