Explain the impacts of exchange rate on international trade.
As supply and demand for currencies change, the values of those currencies change. When the U.S. dollar is strong, imports seem less expensive, leading to increased demand for imported products and the currency needed to purchase them. In addition, when interest rates in another nation are higher than those in the U.S., demand for the foreign currency rises, as people buy the currency in order to invest in the other nation’s securities. At the same time, a stronger dollar decreases exports, because they appear more expensive to foreign consumers. Therefore, a trade deficit develops as the result of a strong dollar. The opposite effects result from a weak U.S. dollar. While importers prefer a strong dollar, exporters prefer a weak dollar.
The differences in currency values can affect our ability to buy imports or sell exports, affecting our standard of living. Therefore, the effects of currency crises in other nations are not limited to those nations -- they can affect our economy and our lives in important ways.