Global economies and the impact of currency fluctuations  - IntroductionGlobal economies and the impact of currency fluctuations  – Introduction

Currency fluctuations are a natural outcome of the floating exchange rate system that is the norm for most major economies. The exchange rate of currencies is influenced by a combination of factors, including supply and demand, economic performance, outlook for inflation, interest rate differentials, capital flows and others. As these factors are generally in a state of constant change, currency values fluctuate from one moment to the next.

 

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However far-reaching the impact of a fluctuating currency on the local economy might be, most people do not pay particularly close attention to exchange rates because most of their business and transactions are conducted in their domestic currency. The average consumer, if he or she might exist, will only be aware of exchange rates when he has to travel abroad or purchases goods online with a foreign supplier or even when he receives money from relatives overseas.

Most people would think that a strong domestic currency is a good thing, because it makes it cheaper to travel abroad, for example, or to pay for an imported product. In reality, though, a strong currency can on the long term exert a significant influence on the economy as industry sectors will be made less competitive, which might lead to considerable job losses. And while consumers may disdain a weaker domestic currency because it makes cross-border shopping and overseas travel more expensive, a weak currency can actually result in more economic benefits.

The value of the domestic currency in the foreign exchange market is an important instrument in the monetary policy of a national bank for in stance. Directly or indirectly, currency levels will affect a number of key economic variables and our daily lives. For instance, they might influence the interest rate you pay on your mortgage, the returns on your investment portfolio as well as the price of groceries in your local supermarket and even your job prospects.

Currencies such as the Brazilian Real and Turkish Lira have suffered further from political turmoil, while others, including the Russian Rouble and Ghanaian Cedi, have experienced unprecedented levels of volatility and violent shifts in investor sentiment. Many, including the Malaysian Ringgit, South African Rand and Mexican Peso, have even plunged to all-time lows, compounded by the decision of the People’s Bank of China to devalue the Chinese Yuan in August.

Currency fluctuations can therefore have a wide-ranging impact not just on a domestic economy, but also on the global one. They also do not make life easy for researchers who might want to compare economic performance and data between countries. In later articles we will review some world and emerging economies, how they performed and their outlook for the coming period.

The following table shows the average exchange rate of selected currencies to the US dollar compared to 2014 and 2013:

 

2015

2014

2013

Russian Ruble (RUB)

61.1946

38.5122

31.8550

South African Rand (ZAR)

12.7645

10.8420

9.6436

Euro (EUR)

1.1096

1.3297

1.3281

Argentine Peso

9.246127

8.112885

5.474531

Brazilian Real

3.3360

2.3512

2.1570

Canadian Dollar

1.2791

1.1043

1.0300

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IORMA Research – February 2016