CARLOS BARRERO

Carlos Barrero

Carlos Barrero

Yes he should continue selling flowers in the US market because the currency price of one country advances and retreats daily against another country's currency. But what exactly does that mean for those who don't trade in forex market? Currency exchange rates affect travel, exports/imports and the economy. In this article, we'll discuss the nature of currency exchange and its effect on people and the economy. (Sam , 2006)

Before delving into the topic in more detail, we must first establish a constant; for demonstration purposes we will be talking about the relationship between the peso and the U.S. dollar. More specifically, we will be talking about what happens to the U.S. economy and to the economies of Colambia if the peso trades markedly higher against the U.S. dollar. The assumption we will be making is that US$1 will purchase 0.7 Peso.

The impact that this scenario would have on corporations (particularly large multi-nationals) is a little more complex because these businesses often conduct transactions in a number of different currencies and tend to obtain their raw materials from a wide variety of sources. That said, U.S.-based companies that generate the majority of their revenue in the U.S. (but that source their raw materials from Colambia) would likely see their margins take a hit on higher costs. (To read more on this subject, see Commodity Prices And Currency Movements and Global Trade And The Currency Market.) (Sam , 2006)

Similar pain would be felt by U.S. companies that must pay their employees in Peso. And by definition, these decreased margins would likely have an adverse impact on overall corporate profits, and therefore on equity valuations in the domestic market. In other words, stock prices may drop due to these lower earnings and forecasts for future profit potential.

On the flipside, U.S. companies that have a hefty overseas presence and draw in a significant amount of revenue in Peso (as opposed to dollars), but pay their employees and other expenses in U.S. dollars could actually fare quite well.

Colambian companies that generate the lion's share of their revenue in Peso but who also source their materials or employees from the United States as part of their business would likely see margin expansion as their costs and currency decrease. By definition, this could lead to higher corporate profits and equity valuations in some overseas stock markets. However, Colambian companies that garner a significant amount of their revenue from the United States and ...