Why is the foreign currency exchange market important to a business?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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Foreign exchange markets are important to any firm that imports or exports as part of its business.  Changes in the value of the dollar (if we are talking about US companies) relative to the currency of other countries can change the firm's cost of doing business and/or its ability to sell its products.

For example, let us imagine a US firm importing things from China.  If the dollar gets weaker relative to the yuan, the firm's costs go up.  It has to spend more dollars to buy the products that it needs from China because it has to pay more dollars in exchange for each yuan.

Now imagine a firm selling to the Euro zone.  If the Euro gets weaker relative to the dollar, firms in the Euro zone will find that it is more expensive to buy the firms products.  They may well stop buying so much from the firm because it costs more euros to buy each dollar than it previously did.

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