How does the fluctuation of a currency impact international trade?
Exchange rates are one of the most studied and analyzed macroeconomic indicators in international trade. Determines the value of one currency in regard to another. Having said this, it is concluded that the fluctuations between the different currencies can positively or negatively affect the exports of merchandise.
The usual in international trade is that the importer pays for the products purchased in the currency of the exporter's country. Many providers tend to prefer this way or even establish it as a requirement, avoiding fluctuations and achieving stability in charges. That being said, there are two major assumptions or variables in currency fluctuations:
The depreciation or devaluation of a country's currency favors its exports, since its products are worth less and, therefore, they become more competitive in the international market.
The revaluation or appreciation of the currency of the exporting country can harm its exports, because the higher the price of a good, the lower its competitiveness in the international market.
Does the dollar-euro parity positively affect Spanish exports?
This summer, and for the first time in 20 years, the dollar reached parity with the euro. Our currency has been gradually losing value and economists indicate that the main factors to which this situation is attributed are: the War in Ukraine and a rise in interest rates by the United States Federal Reserve carried out more quickly than the rise in rates from the European Central Bank.
On the one hand, it has negatively affected imports (mainly from Asia) of energy and industrial raw materials, such as metals, and agricultural ones, such as feed and cereals. Price inflation in Spain has not helped as it makes prices even more expensive. This also decreases the confidence of global investors in our country (and in Europe in general), taking their investments to the United States. Consequently, experts recommend importing from European countries, rather than from other countries.
However, the current monetary parity means that €1 is trading at $1.05, which favors Spanish companies that decide to export to markets outside the European Union. Specifically, it lowers the cost of exports to the United States and to countries that operate in the US dollar as international currency, such as Latin America. With these evidences, a golden opportunity seems to have opened up to enter the US market and expand there.
This is good news since it helps to offset the extra costs caused by the high prices of the products and the problems in the supply chains, as has been declared by companies like Asoliva. A good study of the market that you intend to penetrate includes analyzing the fluctuation of the currencies of those two countries, which can negatively affect international sales. If you want to know more about it, we invite you to read our article about it by clicking on the following link: "Why international sales departments do not reach their annual objectives and how to solve them".
In short, the United States model is characterized, especially in recent times with the Biden Administration, by its stimulus plans and the rise in interest rates that are reactivating and creating a growing and attractive industry. For this reason, a context is looming in 2023 that makes the United States a very interesting country to which to export and, even, where to establish Spanish businesses.
How to minimize the risks posed by fluctuations in exchange rates?
International sales, and therefore its profitability, can be conditioned by currency fluctuations. That is why it is determined that there is a currency risk or exchange rate risk. There are various methods or options available to a company to minimize such risks.
Internal coverage techniques, of which we could highlight two main ones: establishing the national currency as the currency for the international operation and making the payment at the time of contracting, avoiding that exchange rates can negatively affect until the expiration of the credit.
External coverage techniques, which are taken regardless of the importer. Of these we can highlight the forward contracts or the futures market on currencies. However, the most popular is the credit insurance contract: currency fluctuations can negatively affect an importer, for example, by making the goods he wants to buy more expensive and, consequently, leading to a default.
Written by Manuel Alcocer Álvarez
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