The Relation Between Currency Strength and International Trade

In the wake of globalisation, business is no longer confined within the borders of a nation. The more you reach out for trade, the more your country’s economy gets stronger. However, currency strength, that is, the value of the currency of a particular country, directly influences its international trade. Let us see how.

What is Currency Strength?

The national currency strength largely determines the dominance of a country in the arena of global trade. The stronger a country’s national currency, the more powerful its position in the global economy and international politics. Currency strength is the relative purchasing power of a country’s national currency while trading for products or against the value of other currencies. It is evaluated based on the quantity of products and services to be purchased and their exchange value.

A combination of several local and international factors determine the currency strength of a country. Factors that affect currency strength include:

• Foreign exchange markets
• Interest rates of the country’s central bank
• The inflation in the country’s domestic economy
• The country’s trade balance.

Based on these factors, the currency strength of a country can be evaluated in terms of its value, utility, and reserve. By value, we mean the relative purchasing power of the currency vis-a-vis other foreign currencies. Utility means the relevance of that particular currency as an important exchange device in the international economy. Reserve indicates its acceptability as in international trade, urging foreign national banks to hold reserves.

Currency Strength and International Trade

Currency strength in the domestic market is calculated in terms of purchasing power when buying local products or services. In the international market, the currency strength is calculated in relation to foreign currencies in forex pairs. The connection between currency strength and international trade is quite obvious; the more your relative purchasing power, the higher will be your spending power. 

Lower valued currencies or a weak currency strength make imports more expensive and exports profitable in the international market. Likewise, for a higher currency strength, the country’s imports become profitable while exports become more expensive in the international market. A higher exchange rate may topple the country’s balance of trade, while a lower exchange rate might improve it.

Let us have a look at the economic repercussions of a weak and strong currency:

Strong Currency and its Impact

The immediate effect of a currency becoming stronger is highly risky. So the question is, should an economy aim at a stronger currency or not? The answer is yes, as there are many long-term advantages. However, many national governments are not ready to take the immediate risk, eyeing the long-term benefits. 

Nevertheless, it is necessary to know the long-term benefits of a strong currency.

Benefits

• A country with strong currency can purchase products and services at a lower cost from other countries. This may bring down the prices of these products and services in the domestic market.
• Cheaper imports lead to controlled inflation of the economy.
• Higher purchasing power means stronger spending capacity, which makes people feel more affluent.
• With controlled inflation and a high GDP rate, higher currency strength can become a high in-demand global currency.
• A strong and stable currency sees a lot of overseas investment in government bonds, even at low-interest rates.

Weak Currency and its Impact

A stronger currency has many advantages, but even a weak currency has its set of benefits. Let us have a detailed look at the pros and cons of a weak currency.

Pros & Cons:

• Exports become more profitable; if the exchange rate becomes higher, the exporter country makes more profit.
• The import of goods and services becomes more expensive. When the national currency devalues, the traders/ companies are encouraged to source the particular goods internally.
• When exports increase, the companies make more profit, and the employees get better compensation. More income means more spending power. When import falls, the demand for domestic products increases. Increased demand for domestic goods/ services coupled with increased spending power results in the growth of the domestic economy and higher GDP.
• A rise in exports and a fall in imports leads to an improved current account deficit. This indicates increased forex reserves of the country.

Besides these advantages, there are two major cons involved in the devaluation of currency:

• Low purchasing power; you won’t be able to afford the same holiday package in a country with higher currency strength at the same price after devaluation.
• A rise in exports may lead to inflation. With increased demands in the global market, the companies do not feel obligated to reduce prices locally.

India’s Currency Strength and International Trading

According to recent reports, the Indian Rupee dropped past 74 to the USD in July. This is the lowest point the Rupee has hit since mid-April amid the threat of reimposition of lockdown in several countries. The USD/INR exchange rate indicates how much stronger one currency is in comparison to the other. The exchange rates keep fluctuating almost every hour.

For a weak currency strength as Rupee with respect to the USD, let us try to understand the international trade trends with examples:

• Profitable export: Suppose an Indian company exports cotton textile to the USA at $10/ piece, at Rs. 70 USD/INR exchange rate. Now the exchange value drops to Rs. 74 per USD. So, the Indian exporter earns Rs. 740 per piece instead of Rs. 700, going by the current exchange rate. Thus, devaluation is profitable for exports.
• Expensive import: Suppose an Indian buyer aims to import small machine parts costing $10/unit at Rs. 70 USD/INR exchange rate. After the devaluation to Rs. 74 per USD, the importer has to pay Rs. 740/ piece instead of Rs. 700.

This clearly illustrates how weak currency strength is directly related to profitable export. Besides, expensive imports always encourage local manufacturing and production.

How does Imprezz Support International Trading

With the one-stop solution to all your business problems, the Imprezz software helps manage a business from any part of the world. It takes care of quotations and invoices, manages articles and stocks, handles bulk payments and follows up dues with your customers. All your accounting and taxation documents are kept organised and absolutely paper-free with Imprezz. All documentation is compliant with the accounting laws of the land, a crucial requisite of international trading. Imprezz takes care of your everyday business operations and allows you to focus on expansion. Its unique multi-currency feature makes business across borders convenient. Once the customer’s country and currency details are saved, the software converts the item price to the customer’s currency as per the current exchange rates. This makes the transaction in foreign currency effortless for both the parties.

With Imprezz, the evolving business scenario of India gets an error-free and efficient business management tool.