The Effects Of Currency Fluctuations On The Economy
Currency is an important aspect of any economy. Apart from being a means of exchange for commodities, currency by itself is also a commodity that has ramifications to the economy. As events around the forex in Spain (check Spain news: Forex españa) have recently shown, currencies can play a big role in helping an economy revive. There are many effects to the economy that can come as a result of currency fluctuations. Some of them can be irrelevant to the welfare of the economy but most of them have far-reaching effects. In the modern connected world, currency fluctuations in the major economies can lead to global ripple effects. Below are some of the key effects of currency fluctuations on the economy.
photo/ Gerd Altmann
Short-term Effects
In the short term, currency movements only affect some few microeconomic areas like consumer demand. Consumer demand in-turn affects the supply of goods. Generally, short-term effects of currency fluctuation include:
- Changes in the price of commodities. When the currency appreciates, it becomes relatively easier to afford commodities as the value of the currency is strong. People can be able to buy goods at fair prices. The depreciation of a currency leads to the inability to buy foreign goods. This not only affects the prices of foreign goods but also local goods. Commodities that would otherwise be imported become a burden to get and the pressure on the market affects all related sectors.
- Consumer demand. Currency fluctuations also affect overall consumer demand. The volatility generated in the market leads to uncertainty. People, therefore, tend to hold off investments until the market is more stable. This leads to a weaker economy that is heavily under pressure from increasing demand.
Long-term Effects
The long-term effects of currency fluctuations are responsible for the most serious changes to an economy. In general, the two main areas of the economy affected by currency fluctuations are:
- The purchasing power. A country whose currency is unpredictable ends up losing demand in the forex markets. The loss of value is reflected in the economy where it becomes very difficult to demand foreign goods. This, in turn, affects the wealth levels in the economy and production of goods goes down. If unchecked, spiraling currencies can completely bring down an economy.
- Foreign direct investments. On the other hand, when a currency depreciates, foreign investments in the economy increase. This is because the weak value of the currency at the forex market is able to attract investors who hope to benefit from a future turnaround. Sectors like the real estate industry benefit from outside investments. If the currency is not regulated, however, the local economy could become completely dependent on global market forces.
In summary
The effects of currency fluctuations to the economy are not entirely bad. For one, the weakening of a currency can help bring in foreign investments. On the other hand, though, the ability of the local economy to sustain itself can be affected immensely. For this reason, most economies often take precautionary measures when the currency starts fluctuating.
Author: Andrew Cioffi
