Exchange rates have a significant effect on companies that do business globally. When companies exchange products or services across borders causing two or more currencies to become involved, fluctuation in exchange rates can lead to gains or losses for the business.
When a U.S. company sells goods or services abroad, it typically requires payment in U.S. dollars. The foreign entity would change its currency into dollars to make payment. The buyer is at an advantage when its currency is relatively strong against the dollar, and is at a disadvantage if its currency is weak.
When an American company imports materials, or buys goods or services from a foreign vendor, it would usually be expected to convert dollars into the foreign currency to make payment. When the dollar is relatively strong, the advantage is to the buyer; when the dollar is weak, the buyer is at a disadvantage.
Price competition can be affected for a U.S. company in the home market if a foreign competitor realizes an increase or decrease in exchange rate for its currency. Foreign competitors might raise or lower prices in the U.S. market depending on gain or loss for exchange rate changes.
- Foreign Currency image by Stephanie Mueller from Fotolia.com