What Are Exchange Rates and Why Do They Matter

Plenty of businesses have to send money overseas for different reasons. They may need to send money to a recipient in Vietnam for example, as a way to pay for inventory or certain services.

When you need to send money overseas quickly, there are some key considerations. First, there is security and the assurance that the money is actually going to make it to its intended destination. Another consideration that has less to do with the money sending service you’re using and more to do with larger factors is the exchange rate.

According to money transfer service Remitly, the current exchange rate for a transfer going from the British Pound to the Vietnamese dong is ₫29,594.00, just as an example.

So what does that mean exactly, what factors influence the exchange rate, and why does it matter to businesses?

What is An Exchange Rate

An exchange rate refers to the rate at which a currency is exchanged for another. In the example above, it’s the Pound being exchanged for the Dong. The exchange rate serves as a measure of how strong one country’s currency is to another.

With the Remitly example highlighted above, the exchange rate is a single British Pound to ₫29,594.00.

Retail Exchange Market

The retail exchange market refers to how currency is exchanged for purposes of payments made across borders, as well as travelers going abroad. In these cases, the currency is purchased by an intermediary, and in our example, that go-between would be the Remitly.

A retail exchange rate is likely going to include a commission so that the services provider can create a profit. However when sending payments abroad, it’s a good idea to compare just how much a service is charging because there can be some variance.

Why Are Exchange Rates Important

There are some direct, obvious ways exchange rates are important outside of business. If you’re planning a trip to a foreign country, for example, you want to have as much buying power as possible.

In the business world, there are direct and indirect ways exchange rates are important.

One of the biggest ways exchange rates affect businesses is through the price of goods. Exchange rates are going to play a role in how much a business is paying for products they import. If you’re using a stronger currency, you’re going to be paying less for the goods your business is importing.

Another way exchange rates and currency are relevant to business is because of inflation. When a country has a weak currency, it can cause the inflation to go up significantly because foreign products are going to have higher prices. As a result of rising inflation central banks in a country will often raise interest rates, which can help prevent an even bigger decline in the value of the currency.

When a country has a strong currency, it can keep inflation at bay, but sometimes too much so.

The Job Market

What a lot of employees and companies don’t understand is how currency value and exchange rates can affect the job market and whether or not companies are hiring. This is one area where a weaker currency can actually be an advantage for employees. When the currency is weaker domestically, there is often a greater demand for exports. Imports become more expensive, so consumers are going to be more likely to buy the items made in their own country.

That means that when the country is producing more, they’re going to need to hire more to keep up.

When a country’s domestic currency is stronger, things can go in the opposite direction and employment can slow down.

Finally, there are effects felt in investments, which can impact businesses as well. For example, if the U.S. dollar is strong, it can make the demand for items that are priced in the dollar go down.

Additionally, if a business has a presence in other countries, it can be significantly impacted by exchange rates. If you’re doing business in a country that currently has a strong currency, it can affect sales overseas.

Most of us don’t even see how much currency and exchange rates affect our daily life. You might think about it if you’re planning a trip, but you may not think about the huge effects on your business, particularly if you’re in a business that has overseas interests. The changes in currency can affect the economy as a whole, the job market and the profitability of individual businesses so it’s good to keep an eye on these exchange rates and try to plan for changes that could be coming.