An exchange rate is the ratio where the currency of a country can be exchanged for the currency of another country. Exchange rates are needed to facilitate international trade including the purchase of goods, services or capital from one country using that country’s own currency.

The variables that determine an exchange rate are based upon the demand and supply for a currency. For example, a high demand for European Union goods lets the price that other countries must pay for the Euro increase or pushes the exchange rate higher.

This can and does effect international trade quite dramatically. Profits can be lost with small movements on exchange rates, and in some cases traders can end up in a loss making venture. Where ordering goods need to be manufactured, for example, there may be as much as a six month wait between deposit paid and full payment in which time currencies may have moved against an impoter/exporter.

Methods of limiting the damage this can do are available but nothing is watertight. The euro strengthening against the pound has seen many smaller traders suffer and the dollar weakness has produced a mass exodus to the US for purchases.

For a detailed analysis on how to limit your exposure feel free to contact us and for a summary of some of the methods employed today please click here.