This post looks to answer the question: when might it be important to know a currency’s exchange rate?
And provides 3 examples to assist.
What is an exchange rate?
An exchange rate is basically the amount of money you can get when you change your local currency (usually) to a foreign one.
For example, the current exchange rate for the dollar to the pound is around £0.72.
So for every dollar I have I can get £0.72.
It’s probably a little less than that as you often have to pay various commissions and fees when you exchange money.
But excluding those fees, that’s the exchange rate of the dollar to the pound today.
3 Examples of When It Might Be Important to Know a Currency’s Exchange rate
#1 When You’re Planning a Vacation or Trip Abroad
When you go on vacation, a trip, or perhaps even away on business, you’re going to want to know how much your cash is going to be worth when you get there.
The problem is that economies across the globe vary greatly.
A cup of coffee in Delhi, India might cost you the equivalent of 50 cents.
In Zurich, Switzerland that same cup of Joe might set you back $6.00!
The key take away from this, is that you need to know the exchange rate so you can budget accordingly.
You’re probably not going to be able to do all that much if you take 100 bucks to Stockholm, Sweden.
Whereas if you take that same $100 to Phnom Penh, Cambodia you can probably have a whale of a time.
#2 When You’re Operating an International Business
The exchange rate can be a critical factor in running any business where international trade is involved.
Whether you’re an importer or an exporter of goods, or even both, the exchange rate can be extremely important when it comes to running a viable business.
Let’s say you’re based in London, England and you’re an importer of Japanese steel.
The currency of exchange in that scenario would be the pound vs the yen.
Let’s say the cost of one tonne of Japanese steel usually costs you ¥200,000 and you pay your Japanese supplier in that currency.
But the pound then dips by a couple of percent due to a recession!
This would mean you would have to pay more pounds for the same amount of steel simply because the pounds you have are now worth less.
On the flip side to that, if you’re exporting English steel to Japan, rather than importing it, and the pound suddenly drops, you’re much happier.
#3 When You Have Certain Investments
The exchange rate can have an impact on any investments that you have.
A stronger dollar often means that commodities are less in demand across the globe as they are often priced in dollars.
This can mean any investments you have in commodities, in the USA especially, can be affected by a weak exchange rate and undervalued currency.
Exchange rates do not often play a huge part in people’s minds. For the most part, we do not have to worry about them.
For most of us, it’s only in certain situations like if we go abroad that exchange rates become more important and apparent.
Despite this, exchange rates are a extremely important, especially in a commercial setting.
It is usually the knock on effects of changes in the exchange rate that the economy is affected by the most and these can be wide reaching. The exchange rate can have an indirect effect on:-
- The job market
- House prices
- The cost of food
- The growth of investments
- Interest rates