Fx Rate Fluctuation and Its Impact on Global Trade

Fx rate fluctuation can have a significant impact on global trade, making it challenging for businesses to predict and manage their expenses.

A 10% change in the exchange rate can result in a 10% increase or decrease in the value of a country's exports or imports. This can be a major blow to companies that rely heavily on international trade.

For example, a US-based company that imports goods from China may see a significant increase in costs if the value of the Chinese yuan (RMB) suddenly drops against the US dollar. The same company may also see a decrease in revenue if the RMB appreciates against the dollar.

The impact of fx rate fluctuation can be felt across various industries, from manufacturing to retail, and can have far-reaching consequences for the global economy.

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The dollar has been trending higher since late September 2024, with some of it due to the Federal Reserve's interest rate stance.

The Fed has openly scaled back expectations for rate cuts in 2025, which may mean U.S. interest rates stay elevated for now.

This is likely to put the dollar in a stronger position versus the euro, yen, and other major currencies.

The dollar strengthened 6.4% in value versus the euro in 2024, and remained relatively flat to the euro in the first days of 2025.

Relative currency values reflect the global flow of funds, and when the dollar strengthens, it means more foreign money is flowing into the U.S. than the other way around.

The dollar's strength may also be attributed to speculation about potential tariff impacts on central bank interest rate policy, particularly with President Donald Trump now in office.

Tariff hikes on imports from major trading partners China, Canada, and Mexico may potentially push prices higher, deterring further Fed interest rate cuts and bolstering the dollar.

Worth a look: Fed Raise Rate

The dollar has been on a rollercoaster ride in recent years, influenced by a variety of factors. Since late September 2024, the dollar has generally trended higher.

Multiple factors may be contributing to the current rally, including the Federal Reserve's interest rate stance and expectations of new Trump administration tariff policies. This has led to a strengthening of the dollar against the euro, yen, and other major currencies.

The dollar's strength can be attributed to the flow of funds, with more foreign money flowing into the U.S. than the other way around. This is reflected in the dollar's gain of 6.4% in value versus the euro in 2024.

In 2024, the dollar also rallied against the yen, despite the Bank of Japan raising interest rates for the first time in 17 years. The dollar regained strength in late 2024, after initially weakening in response to the yen's increasing value.

The impact of currency movements shouldn't be a major consideration for investors assessing the value of specific stocks. However, for U.S. investors with overseas-based positions, currency fluctuations can have a significant effect on their returns.

For example, a U.S.-based investor in the MSCI European Union (EU) Index would have seen a net return of just 6.39% in 2025, due to the dollar's relative strength over the period.

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The dollar rallied against the yen in 2024, after the Bank of Japan raised interest rates for the first time in 17 years, strengthening the yen initially.

This was a significant move, as the BOJ's decision helped to boost the yen's value against the dollar.

However, the dollar regained strength later in the year, as shown in the chart that illustrates the yen's increasing value from September to November, followed by the dollar's upward trend.

The dollar's fluctuation in value is largely driven by central bank policies, particularly interest rates set by the U.S. Federal Reserve and its counterparts in other countries.

If attractive interest rates and economic conditions in the U.S. draw foreign investors, the dollar tends to gain strength.

In contrast, if other countries offer more attractive interest rates and favorable economic conditions, their currencies are likely to gain strength, and the dollar will weaken.

The dollar's value is also influenced by economic growth relative to inflation, which can dictate the flow of funds between markets.

The dollar's value can fluctuate significantly over time, and understanding these trends is crucial for investors with international holdings. Currency values can be influenced by various factors, including central bank policies and economic growth relative to inflation.

For U.S. investors, the impact of currency movements shouldn't be a major consideration when assessing the value of specific stocks. However, for those with overseas-based positions in their portfolios, currency fluctuations can have a significant impact on their returns.

The dollar's trend against the euro has been relatively stable over the past 15 years, with the two currencies often trading near parity. Between 2008 and 2022, the dollar strengthened against the euro, and by August 2022, the exchange rate was $1 to 1 euro.

Currency valuations fluctuate constantly, driven by the flow of funds between markets. Central bank policies, such as interest rates set by the Federal Reserve and its counterparts, and economic growth relative to inflation are the two biggest drivers of currency valuations.

Consider reading: Inflation Japanese Yen

A stronger dollar can be beneficial for U.S. investors with international holdings, as it can enhance their net returns after calculating the currency exchange impact. In contrast, a weaker dollar can detract from their returns.

Since late September 2024, the dollar has generally trended higher, driven by the Federal Reserve's interest rate stance and expectations of new Trump administration tariff policies. The dollar's rally against the euro in 2024 was 6.4%, and it has remained relatively flat in early 2025.

A stronger dollar can lower the cost of imported products from other countries. For example, a car made in Germany would cost less in the US if the dollar strengthens.

However, a strong dollar can also hurt multinational companies based in the US. Their net income from foreign sales will decrease once exchanged into dollars, making them less competitive.

The dollar's strength can have a ripple effect on the global economy. It can lead to lower sales for US companies that export products abroad, as foreign buyers shift to lower-cost alternatives.

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US monetary policy can also have a global reach. The Fed's actions, such as quantitative easing, can affect the global economy by influencing the demand for US safe assets.

This can lead to a wave of defaults or financial stress in other countries, particularly those that borrow in dollars but have cash flows in foreign currencies.

However, the Fed can also harness this mechanism to stabilize foreign financial systems. By increasing the supply of reserve assets, they can provide more liquidity to the market and help prevent financial crises.

The research suggests that demand for US dollar safe assets is a key driver of exchange rate fluctuations. This is a surprising finding, but it makes sense when you think about it.

The special demand for US safe assets is closely related to exchange rates, according to the research. This has significant implications for the global economy.

Worth a look: Fed Raising Rates

Managing currencies can be a challenge, especially when exchange rates fluctuate frequently. Staying up to date with currency movements is essential to make informed decisions.

HSBC's Mobile FX services provide live market updates and historical rates, allowing you to make informed decisions about your currency trades. This can be a valuable tool for businesses and individuals managing multiple currencies.

To hedge against foreign exchange risk, businesses can use forward contracts, currency options, currency ETFs, or foreign exchange rate alerts. These tools can help mitigate the risk of exchange rate fluctuations.

Here are some common ways to hedge against foreign exchange risk:

By using these tools, businesses can gain a competitive advantage and plan with confidence.

Understanding Rates is key to navigating the complex world of fx rate fluctuation. Inflation and interest rates are closely related and have a significant impact on exchange rates. Too much inflation can be a problem, as goods and services become less affordable.

Central banks consider this balance when setting interest rates. For example, the Bank of England has an inflation target of 2%, as of 22 May 2020. If inflation is below its target level, a central bank may look to cut interest rates, making it cheaper to borrow and less rewarding to save, which encourages people to spend.

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Lower interest rates can increase demand, pushing inflation higher. But if inflation is rising too fast, a central bank may increase interest rates, aiming for the opposite effect. Higher rates can make it more expensive to borrow and more rewarding to save, reducing demand and slowing inflation.

Higher interest rates can increase a currency's value by attracting more overseas investment. Currency traders take advantage of these fluctuations in interest rates, exploiting fractional changes in one currency's value against another. A total of 180 currencies are traded in the forex market, with the market dominated by just four currencies: the U.S. dollar, the British pound, the Japanese yen, and the euro.

The value of a currency can make a big difference to the amount you get from a currency exchange. For example, in the 18 months between 1 January 2018 and 1 July 2019, £1 was worth US$1.42 at its highest and US$1.22 at its lowest, a difference of US$200 for every £1,000 exchanged at the market rate.

Here are some examples of how exchange rates can affect the value of your money:

GBP/USD exchange rate = 1.22: £1,000 = US$1,220

These examples illustrate the importance of understanding rates and how they can impact your finances.