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  • Writer's pictureMizan Ahmed

Volatility in Currency: Reasons and Impact

In the dynamic realm of global finance, understanding and effectively navigating currency volatility is paramount for businesses. This phenomenon, marked by sudden fluctuations in currency pairs, can be attributed to various factors such as inflation, demand dynamics, and geopolitical shifts. 


Inflation, a significant driver, disrupts exchange rates as production slows due to shortages. Cost-pull inflation, arising from fuel, labour, or raw material shortages, leads to increased prices for goods and services. Demand-pull inflation, propelled by heightened consumer demand, also influences exchange rates. Additionally, political and economic instability can dissuade foreign investment, resulting in diminished job opportunities and economic stagnation. 


For businesses, currency volatility translates into tangible impacts. Exporters, for instance, may face reduced payments if the buyer's currency depreciates. Conversely, importers might encounter heightened costs due to exchange rate fluctuations between agreement and payment, necessitating a reassessment of trade relationships. 


Currency volatility extends beyond the corporate realm, affecting individuals in their daily lives. Imported goods often witness price hikes when a country's currency weakens, amplifying the cost of living. Businesses, striving to uphold international trade relationships amidst increased costs, may resort to workforce cuts, exacerbating local economic challenges and unemployment rates. 


Investments, including pensions and savings, bear the brunt of a weaker currency. Liquid assets become less valuable globally, potentially hindering financial goals such as property investment or entrepreneurship. Furthermore, individuals may face heightened competition from foreign investors benefiting from favourable exchange rates, limiting local investment opportunities. 


While primarily viewed negatively, currency volatility can present opportunities. A weaker currency can enhance a country's export competitiveness, enticing foreign buyers with relatively lower prices. This surge in exports stimulates economic growth, and over time, increased demand may contribute to a currency's recovery.


Amidst this financial landscape, the COVID-19 pandemic emerged as a seismic event. Pound Sterling, for instance, suffered a 15% fall against the US Dollar, reflecting the pandemic's economic toll. The Chinese Yuan also weakened against the US Dollar in the pandemic's early days, likely influenced by the virus's origin in Wuhan and subsequent stringent safety measures. As restrictions eased, currency volatility for many countries began to stabilize, offering a semblance of normalcy in international trade. 


To shield against currency volatility, businesses can deploy hedging or financial risk management strategies. Maintaining a diverse currency portfolio serves as a buffer against sudden drops in a single currency. Despite the inherent unpredictability, strategic planning based on historical currency trends can offer insights into the potential risks and rewards of different currencies. 


CurrencyTransfer, a trusted partner in this landscape, offers a suite of services to empower businesses. These include a free exchange rate alert service, market orders, and forward contracts to secure favourable rates. These tools enable businesses to make confident international money transfers, mitigating the impact of currency volatility on their financial operations. 


In conclusion, while currency volatility poses challenges, businesses and individuals can proactively manage the risks. Strategic planning, diversified portfolios, and leveraging available financial tools empower entities to navigate the complex landscape of international currency markets. CurrencyTransfer stands as a partner, offering tailored solutions to enhance financial resilience in the face of currency volatility. 


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