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Posted 2018-09-06

The exchange rate has a fundamental role in the economy of a country, since it can directly influence the economic system, affecting the companies. It is the value that a given foreign currency has when it is quoted in fractions of the national currency, besides being the factor responsible for the commercial relations between countries.

If you are looking for tranquility and prosperity in your venture, you need to look at the factors that can influence your business.

So, follow our article and understand the influence of the exchange rate on companies!

Why does the US dollar change?

In general, the rule is the law of supply and demand. When there is US dollar in quantity available in a particular country, the American currency is devalued. On the other hand, when the supply is low, it is valued.

This fluctuation can be quite significant. Just look at the following example: on February 6, 2012, the US dollar was worth R$ 1.72. In 2015, it reached R$ 4 and, in April 2016, it decreased to R$ 3.59. On June 13, 2017, the US currency was R$ 3.31, according to data released by Valor Econômico.

The big question is: what causes this change in the currency? There are many factors that influence the supply and demand of US dollars, causing this rise and fall. One is the exchange rate, which is formed by the ratio of two currencies. This defines the mode of negotiation between two countries, and what will be the price used in each economy.

There are many factors that influence the variation of the currency, among them the exchange rate, which is formed by the relation between two currencies. This defines the mode of negotiation between two countries and what will be the price used in each economy.

And how does the exchange rate influence the economy?

Many do not know, but the exchange directly influences our daily lives. The mere fact that foreign investments are quoted in foreign currencies causes the exchange to directly influence inflation and domestic prices.

Most of the products used within a country are imported, which causes the economy to be deeply affected by the exchange rate. But, in addition to this, we must know the effects of appreciation and exchange devaluation before we see the impacts caused by the exchange rate in companies.

The effects of exchange appreciation and devaluation

The exchange rate also has two sides. See the effects of each concept individually:

Exchange devaluation

In a clear and objective way, the main effect of the exchange rate devaluation is the decrease in imports and the increase in exports, as the value of the national currency decreases in relation to other countries. In this way, the devaluation has positive effects, raising the national economy and providing more competitiveness for domestic products abroad.

Foreign exchange appreciation

The exchange rate appreciation has the opposite effect. Besides causing a drop in the rate of exports because of the increase in prices, it raises the number of imports and generates an increase in inflation.

However, amidst ups and downs, the exchange rate ends up having an influence on companies. Learn how in the next topic.

See the consequences for companies

The exchange rate is responsible for some national economic imbalances, such as rising inflation and rising or falling interest rates. Therefore, the demand for domestic products follows the same pace.

In this way, the companies are affected as follows: in case of an increase in interest rates, the consequence is the decrease in consumption – that is, sales will fall and the company will have to decrease production.

On the contrary, interest may fall, increasing consumption and, consequently, increasing sales and increasing production.

So, to keep the company always prepared in relation to the exchange rate, it is necessary to organize a good cash flow, and also to have a reserve fund.

Author's post: Europartner Accounting