Positive And Negative Impacts Of Currency Conversion

Those familiar with forex trading and the foreign currency exchange market know that the value of a currency can go either way in seconds, allowing forex trades to be either profitable or loss inducing.


However, currency conversions have an impact on the entire economy and businesses and people around the world can gain profit or incur loses depending on the current foreign currency exchange rates.

Multi-national corporations can see their profits drop significantly if their home currency depreciates against other major world currencies. At present, the Euro is strong against the U.S. dollar and those America-based corporations that import raw materials from Euro-denominated territories have to pay higher price for these imports.

Other companies that do not import raw materials from Europe but have many workers on their payrolls that receive their wages in Euro will also suffer from the strong Euro and will see their wage costs go up, which in turn will affect their profits.

In contrast, companies whose primary business generates revenue in Euros, while paying their workers in U.S. dollars, will benefit from the weak greenback and will see their wage costs reduced. As a rule, U.S.-based exporters will benefit from the present situation because a currency conversion between a weak dollar and strong Euro creates increases demand for cheaper goods manufactured in the United States.

Individuals in the euro-zone are in strong position to buy foreign goods, property and to travel abroad in a scenario in which the Euro appreciates against the other major currencies. If the cost of a trip to Hawaii stood at USD 1,000 a year ago and the price is unchanged but meanwhile the Euro gained, say 15 percent, against the U.S. dollar, a European tourist will have to pay 15 percent less for his vacation. The same applies to buying property the price of which is denominated in U.S. dollars. Imported goods become more affordable to customers who are paid in Euros because their purchasing power increases while the price of U.S. dollar-denominated goods decreases.

Hence, businesses and individuals alike should try to protect themselves against currency conversion fluctuations. A good idea is to consult your forex broker or to find a reputable one who can advise you on expected currency moves. The foreign currency exchange market is highly volatile and it is hard to forecast the movement of a currency pair if you are not familiar with the fundamental factors determining the value of a currency. Your forex broker can also diversify your existing currency portfolio or to create one for you in order to protect you from incurring losses in case your home currency starts to depreciate.

If you are planning a trip abroad or intend to purchase foreign property your forexd ealercan advise you on the best time to conduct such a deal. In addition, some Forex brokers and dealers can offer you a better currency exchange rate compared to local high street banks.

Understanding how currency conversion works will allow you to take advantage of foreign currency exchange rate fluctuations and not only save money but also gain profit from the ever fluctuating exchange rates.