August 14, 2015

Devaluation of Currency

currency
Photo by tookapic from plixs.com, Public Domain License CC0 1.0

Currencies, like stocks, are valued based on supply and demand. If the demand for a particular currency is greater than the supply, then the value of that currency will increase. If the value of a currency increases then it will have greater purchasing power. For example, a manager in the Philippines and US may have the same lifestyle, but if the American manager use his dollar in the Philippines, he might afford a greater life style. Technically, when the value of currency is strong, purchasing outside the country or importing has lower cost.

On one side, a weak currency benefit exporters; it gives them a higher local conversion rate. A specific example would be, previous Peso-USD exchange rate is PHP 44 is to USD 1 now it is 46 is to USD 1. The example means that the Peso weakened by PHP 2 against USD. Which means that the Peso purchasing power in United States declined by PHP 2. Previously you need only PHP 44 to buy USD 1, now you need PHP 46. This means that importing goods will increase by PHP 2 per Dollar. On the other hand, if you are an exporter, assuming you have fix income from abroad - your income will increase by PHP 2 per Dollar.

In passing, devaluation or weakening of currency benefits exporter directly and negatively affects the importers. Weakening currency encourages to export goods since it increases the conversion in local currency. On one hand, it discourages importation as it increases the importation cost.

The strategy to increase or decrease the value of a currency will depend on net export (export-import). If a country is a net importer then a strong currency will benefit majority of the businesses; on one hand, a net exporter country will benefit from weak currency.

In the case of the Philippines where slow down in exports were seen, devaluation of currency would be good. China as well is seen to benefit its exporters from currency devaluation while indirectly discouraging importation in order to stimulate domestic consumption.


1 comment:

  1. Currency value should move freely based on supply and demand; currency value should not be manipulated.

    ReplyDelete

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