Economics can sometimes appear merely as the subject we were all forced to take junior year of High-School. These days we occasionally hear about the markets progressing up and down; never quite refraining in constant volatility. Still, there are certain lessons which are essential to understand as both producers and consumers so that we do not over-generalize our current market economy. In this post I will review the principle effects of currency appreciation along with the massive impacts these pose on both individual participants and entire economies. Note that this article illustrates a broad scope on currency valuation and may not necessarily cover other smaller variables or views on economics policy.
- The domestic consumer: This category most likely encompass the average small-scale customer; you and I. We’re in luck! Appreciation of domestic currency increases our purchasing power. Naturally this means that we can buy more domestic goods for the same exact dollar amount. Furthermore, foreign imports appear even cheaper due to the valuation disparity between currencies. So the news is out! Eat, drink, increase consumption, and be marry.
- The domestic producer: In the same circumstance, appreciation in value of domestic currency, times are looking rough for the domestic producer. Since the domestic currency has appreciated against their own, foreign firms are less likely to buy goods from the domestic firm because this option now costs relatively more to the foreign company. On a large economic scale, a decrease in purchases from foreign firms and other consumers can take a devastating blow on the country’s overall import/export balance. Due to this negative trend, countries like China have sacrificed internal increases in consumption for a positive trade surplus by artificially undervaluing currency rates.
- Application in today’s economies: As seen by the countless recent WSJ posts (yesterday and today) regarding the devaluation of the yuan, China continues to push export surpluses by promoting artificial downward pressure on its currency. Unfortunately, this negatively impacts domestic consumption, reducing economic stability in the long run. Only recently has China begun allowing the yuan to fluctuate a bit more, allowing the currency to appreciate at generous amounts until they once again artificially reduce the value as China did yesterday. The US is on the other side of the spectrum at the moment, consistently experiencing trade deficits due to steady dollar appreciation. The US also releases periodic reports which give investors a fairly clear understanding of the strength of the dollar in the global market. As a result, many investors use the US dollar both as the generally accepted tool for international trade and the preferred currency for holding assets and cash accounts in “safe-havens”. This is all due to the dollar’s minimal value fluctuation. These characteristics can actually have a negative effect on the US economy due to high demand for the dollar in international money markets. In short, while domestic consumers enjoy strong purchasing power, domestic producers have a relatively more difficult time selling goods and maintaining bottom lines as a result of currency appreciation.