How Do Currency Fluctuations Affect The Economy?

by Shashank Bhaskar Finance Adviser

Currency fluctuations are a natural result of most major economies' use of variable exchange rates. Exchange rates get influenced by various factors, such as a country's economic performance, inflation expectations, interest rate differentials, capital flows, etc.

The strength or weakness of the core economy usually decides the currency exchange rate. As a result, the currency value might fluctuate from one moment to the next. If you check Euro to INR exchange rates, they fluctuate almost every day.

Currency effects with wide-reaching consequences

Many are unconcerned about exchange rates because they are not that essential. The average person's daily activities take place in their currency. Exchange rates are only relevant for a few transactions, such as international travel, import payments, or international remittances. Most of them in India usually keep track of USD to INR exchange rates.

A strong home currency might appeal to a foreign traveller because it makes travel anywhere in the world affordable. However, a strong currency can have a long-term negative impact on the economy, rendering the entire industry incompetent and, thereby, losing jobs. While some want a strong currency, a weak currency offers more economic advantages.

When it comes to monetary policy, central banks take the value of the native currency in the foreign exchange market into account. Currency levels may influence the interest rate you pay on your loan, the returns on your investment portfolio, the price of food at your local supermarket, and even your job prospects, either directly or indirectly. Hence always convert Dollar to INR using a proper online tool to know its impact on your life.

The effect of currency on the economy

Merchandise trade

The imports and exports between countries happen often. A weaker currency raises the cost of imports while lowering the cost of exports for international buyers. Over time, its trade deficit or surplus influences the country's currency strength or weakness.

On the other hand, a stronger currency reduces export competitiveness. It lowers import prices, causing the trade deficit to widen more, finally causing the currency to weaken in a self-adjusting mechanism. However, an overly strong currency harms export-dependent companies before this happens. That is why traders always use Dollar to INR converter when trading occurs between the USA and India.

Capital flows

Foreign capital tends to flow towards countries with stable currencies, strong governments, and active economies. For attracting cash from overseas investors, a country requires a stable currency. Otherwise, the threat of money depreciation-induced exchange rate losses may dissuade foreign investors.

Foreign direct investment, in which foreign investors buy, sell, and trade securities in the recipient market, and foreign portfolio investment, in which foreign investors buy, sell, and trade securities in the recipient market, are the two types of capital flows. For developing economies like Singapore and India, FDI is a crucial source of funding. Hence, it is vital to convert SGD to INR rates in real-time.