Exchange rates and business - Business Environment

Reference has already been made to the fact that changes in exchange rates can affect businesses in several ways. These would include:

  • making it easier or harder to export (as prices change);
  • making it easier or harder for foreign competitors to penetrate the domestic market (again through the price effect);
  • causing uncertainty in both trading and investment terms;
  • adding to or reducing the cost of imported raw materials and component parts.

In addition, if a falling exchange rate causes inflationary pressures within the economy, this could add to a firm’s production costs (e.g. through higher wage bills) and could encourage the government to introduce counter-inflationary policies which might subsequently depress demand in the home market.

For businesses regularly involved in currency dealing and/or multinational activities, changing currency values can also bring other gains or losses. Shell and Allied Lyons, for example, lost over £100 million each on currency gambles in the early 1990s by entering into deals when the exchange rate between currencies was not fixed in advance. In contrast, Unilever’s record profits for the financial year 1992/93 included substantial overseas earnings, some of which were the direct result of a weaker pound, which in turn meant that remitted profits increased when converted back into sterling. Clearly the introduction of a single European currency will impact upon such gains or losses.

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