Exchange rates show the price of one currency relative to another, reflecting the intrinsic values of the currencies based on several factors. The euro and U.S. dollar are often considered the most liquid forex pair and represent two of the largest economies (the Eurozone and the U.S.). The exchange rate of the EUR/USD pair impacts the demand for other related pairs and local markets and businesses in these regions.
Understanding Exchange Rates
Local and international factors influence exchange rates. These include economic activity, monetary policies, unemployment rate, and gross domestic product (GDP). These factors tend to rise when the economy is strong and fall when in a struggling economy. Institutional traders, who exchange large volumes of foreign currencies through banks and other large financial institutions, also impact the exchange rate.
EUR/USD Exchange Rate History
The EUR came later than the USD in 1999, gaining strength against the USD, which had turbulent periods in the early 2000s. The EUR peaked around 2008 against the USD, which struggled with a failing economy, but the European sovereign debt crisis caused a steep fall in the EUR.
By 2010 and later, the USD gained strength but fluctuated in 2020 (like most currencies) before the EURUSD reached parity in 2022 for the first time in 20 years. The pair has an exciting history for investors but also impacts the daily life and activities of businesses in the Eurozone and the US. Let’s explore how the exchange rates affect firms in the U.S.
The Impact of Higher Exchange Rates
Higher exchange rates on the EUR/USD pair mean that the value of the euro rises relative to the USD, and when this happens, we can expect to see the following.
Changes in Consumer Spending
Lower exchange rates reduce the purchasing power of residents by increasing the price of the same quantity of goods. Consumer behavior changes when this happens, forcing consumers to facilitate purchases or change brands for similar products. Local businesses bear the brunt of this and could experience extended periods of low sales and revenue.
Increased Expenses
Businesses that purchase materials and services, especially from foreign sources, may incur additional expenses when the USD falls. Local companies may also spend more for local products as other companies increase prices to stimulate revenue growth. The final costs fall on consumers, who now pay more for local and foreign goods and services.
Flexible Credit Terms
A favorable outcome of low USD value is lower interest rates; businesses can get loans at friendly rates and negotiate more flexible payment terms. Lenders typically offer loans at lower rates to attract borrowers, but these rates depend on the base lending rate set by the U.S. Reserve Bank.
Increased Wages
Falling purchasing power may cause employees to demand wage increases to stay afloat. This could increase the total expenses of local businesses and impact their revenue. Where wage increments are difficult, companies may experience low employee satisfaction and motivation; this worries business owners.
Poor Investment Returns
Investors, too, are included when the USD falls relative to the EUR. Investors may get the same returns but with lower values. Stocks may lose value as the USD falls, potentially dragging other economic aspects down. Extended periods of poor returns may discourage investors and ultimately reduce the market value of companies.
More Profits for Businesses Earning Forex
Although a weaker USD hurts the economy, American businesses that earn foreign currencies may realize profits when they convert those currencies to the USD, leveraging effective business forex solutions. This is possible when the exchange rate is stronger than the USD.
The Impact of Lower Exchange Rates
When the value of the EUR falls relative to the USD, the latter becomes more robust against the former. A stronger USD means the economy is more robust, and this could impact American businesses in different ways:
Friendly Import/Export Rates
International businesses also benefit from a strong USD by having friendly rates for their import/export activities. Local producers earn more forex from exporting their goods and services, while importers have increased purchasing power thanks to a stronger dollar. This is crucial to the trade relationship between the U.S. and the Eurozone.
Lower Business Expenses, Increased Profits
A stronger dollar also positively impacts business costs. Business owners can spend less on expenses and even outsource jobs where necessary. The economy grows stronger as local companies grow, and the demand for USD remains high.
Increased Investments
Local and foreign investments flow when the exchange rate improves. The demand for the USD also drives the exchange rate higher as foreign direct investments flow, and traders push liquidity to the currency.
Effects of Dollar Strength and Weakness
The exchange rate between the euro and the U.S. dollar greatly affects businesses in America. When the dollar is weak compared to the euro, imports are more expensive, and exports are cheaper for American companies. This can hurt businesses that rely on imported goods and materials. However, it can help businesses that export products overseas. On the other hand, when the dollar is strong against the euro, imports and exports are cheaper. This can benefit businesses that import foreign goods but hurt those that export and rely on overseas sales. The dollar’s value also impacts consumer spending, investment, borrowing costs, and overall economic conditions in the United States. The exchange rate is an important factor that all businesses must pay attention to.
By Chris Bates
