Movement in a currency’s exchange rate affects the activities of both domestic and international companies. For example, exchange rates influence demand for a company’s products in the global marketplace. A country with a currency that is weak (valued low relative to other currencies) will see a decline in the price of its exports and an increase in the price of its imports. Lower prices for the country’s exports on world markets can give companies the opportunity to take market share away from companies whose products are priced high in comparison.
Furthermore, a company improves profits if it sells its products in a country with a strong currency (one that is valued high relative to other currencies), while sourcing from a country with a weak currency. For example, if a company pays its workers and suppliers in a falling local currency and sells its products in a rising currency, the company benefits by generating revenue in the strong currency while paying expenses in the weak currency. Yet managers must take care not to view this type of price advantage as permanent because doing so can jeopardize a company’s long-term competitiveness.
Exchange rates also affect the amount of profit a company earns from its international subsidiaries. The earnings of international subsidiaries are typically integrated into the parent company’s financial statements in the home currency. Translating subsidiary earnings from a weak host country currency into a strong home currency reduces the amount of these earnings when stated in the home currency. Likewise, translating earnings into a weak home currency increases stated earnings in the home currency.
Figure 10.1 shows exchange rates between the U.S. dollar and several major currencies. Since around 2001, the value of the U.S. dollar has fallen against the British pound and European Union euro. The low value of the dollar lowered prices of U.S. exports to other countries and raised prices of imports into the United States. The value of the U.S. dollar versus the Japanese yen is mixed recently, with periods of rising value and periods of falling value.