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Forex Conversions And Its Impact

February 12, 2009 by  
Filed under Forex Market

Currency prices between countries change on a daily basis. How does this impact on individuals, investors and corporations? It affects the economy, imports, exports and travel, along with forex traders.

Corporations

Many corporations, particularly the larger multi-national companies, conduct business transactions in several currencies. The companies often source their required raw materials from various global sources. At the moment, US companies who obtain their raw materials from Europe will see their margins drop considerably as it will cost them more. The same problem would be experienced by US companies who pay seconded employees in Euros. Not only will the effect be on profits for the company, but it will affect the US market as regards equity valuations. This could well see a dip in the stock prices due to the lower earning rate and future forecasts.

The other side of the coin will be observed with US companies who have a big presence in Europe and earn all their income in Euros. If they make all their payments to employees and for expenses in US dollars, they will show a huge profit margin.

The reverse situation applies to big corporations based in Europe. If these companies do most of their trade in Euros, but source their raw materials and employees from the US, they would see an increase in profits. European companies that earn most of their income from the US, yet pay expenses in Euros will see a dip in their profit margin.

Travelers

Overseas travelers are affected by the changes in currency rates as they require foreign currency if they travel. It is not possible for an American traveler to pay for goods or services in dollars if they are travelling in Europe. This means that the traveler would have to exchange US dollars for Euros to enable him or her to survive in Europe. If the foreign exchange rate is such that for one dollar you get 0.8 Euros, it would cost the American traveler so much more to holiday outside their country.

Foreign Investment

If you base the exchange rate on one dollar to 0.8 Euros, it would make sense for Europeans to invest in the US as they would be getting more dollars for their Euros. This has happened in the past where foreign currencies against the dollar have traded at high levels. It provided foreigners with the opportunity to invest in the US as it was cheaper for them to do so. At this currency exchange rate, it would be unwise for Americans to invest in a foreign country with a high exchange trade rate.

If you are planning an overseas trip, you should keep up to date on the currency rate prior to booking as it may be more beneficial to change your destination, depending on the current rate.

Corporations should keep up to date with the exchange rate as this will allow them to see if the currency they intend buying is experiencing shifts. This will allow them the opportunity to either stock pile goods or delay purchase of raw materials at the higher cost, in the hope that the rate may swing to their favor.

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