Currencies and Exchange Rates: Financial Conditions for Importing/Exporting
Values of currencies do not remain fixed — they change, sometimes rapidly, as currencies are traded in the world’s financial centers. Fluctuating currency values can result in major losses if a currency trader’s timing is wrong, so you need to have a keen awareness of exchange rates and use them as a factor in deciding when and where to do business.
Make sure you’re able to read and understand foreign exchange quotations and to recognize and understand currency exchange risks. Many newspapers list the foreign exchange table in their finance sections. You may see a quote like the one in the following table.
|US$ Equivalent||Currency per US$|
|United Kingdom (£)||1.8412||1.8498||0.5431||0.5406|
|1 month forward||1.8422||1.8508||0.5429||0.5403|
|3 months forward||1.8448||1.8534||0.5421||0.5395|
|6 months forward||1.8483||1.8571||0.5410||0.5385|
The table shows that at close of business on Monday, the British pound cost in U.S. dollars was 1.8412, and at the same time on Friday, the pound cost in U.S. dollars was 1.8498. The table also shows that at close of business on Monday, the U.S. dollar was valued at 0.5431 British pounds, and at the same time Friday, the U.S. dollar was valued at 0.5406 British pounds.
The spot rate is the exchange rate between two currencies quoted for delivery within two business days. The forward rate is for delivery in the future, usually 30, 60, 90, or 180 days down the road.
Suppose that 1 U.S. dollar equals 100 Japanese yen. If you sell an item to a client in Japan for US$10,000, the item would cost the client in Japan ¥1,000,000. If the rate of exchange fluctuates to ¥125 to the dollar, the same item would now cost your client ¥1,250,000.
In this example, the dollar is getting stronger. It’s making your product more expensive and, hence, more difficult for you to export. On the other hand, a strong dollar enables you to import more goods, because the dollar has a stronger buying power.
Importers like a strong currency, and exporters like a weak currency. As the value of a currency increases in relation to another country’s currency, exports decrease and imports increase. On the other hand, as the value of the currency decreases in relation to the other country’s currency, imports increase and exports decrease.
The risk due to the fluctuation in the exchange rate is always assumed by the individual who’s either making or receiving the payment in a foreign currency. In other words, if you don’t want any risks as an exporter, invoice your client in U.S. dollars; as an importer, always request that the supplier quote you in U.S. dollars.
The Federation of International Trade Associations (FITA) offers daily exchange rate quotations between more than 120 currencies. The rates, which are provided by Reuters, are updated at about 5:00 p.m. Eastern Time (U.S.).