Currency exchange rates and your business
- Sandra Visser-Meijer
- Background
- 15 May 2023
- Edited 29 Sept 2022
- 2 min
- Managing and growing
- International
The foreign exchange market is dynamic and subject to constant change. Various currencies are traded on the foreign exchange market, such as the euro, US dollar, British pound, and Russian ruble. With one coin you buy another coin. For example, you can buy American dollars with euros. The foreign exchange market is where the supply and demand of money meet. This determines the price of a specific currency. This price is called the exchange rate.
International business and exchange rates
Currency in a country can be affected by economic sanctions war or bad macroeconomic data. This has consequences when you do business internationally. When doing business outside the eurozone, the exchange rate determines if a product or service is cheaper or more expensive.
Consequences for importer and exporter
An increase or decrease in the exchange rate of one currency compared to another determines if importing or exporting becomes more or less favourable for you.
For the importer, if the euro increases compared other currencies, the product becomes cheaper. If other currencies increase higher than the euro, the product becomes more expensive. The opposite is true for the exporter. If the euro increases compared to other currencies, the product becomes more expensive. If other currencies increase compared to the euro, the product becomes cheaper.
Covering currency risk
You can have a currency risk (in Dutch) when paying or getting paid in another currency. Due to a fall in the exchange rate of the other currency, you as an exporter receive less money. When there is an increase in the exchange rate of the other currency, you as an importer pay more money. You can cover currency risks in various ways. For example, include a currency clause in your contract. You state in your contract that you will adjust the sales price to the applicable exchange rate at the time of payment. You can also open a foreign currency account with your bank to cover currency risk. Consult with your bank to find out what is the best solution for you.
How does an exchange rate work?
A strong euro means that the exchange rate of the euro is high compared to other currencies. A high euro exchange rate makes our products and services more expensive for foreign customers.
Example: US Dollar
You negotiate with an American customer about the sale of a product with a value of €100,000. The exchange rate of €1 expressed in US dollars at that time is:
€1 = $US 1.10 or €100,000 = $110,000 US.
After a month you close the deal. During that month, the exchange rate of the euro increased against the US dollar, namely:
€1 = $1.20 or €100,000 = $120,000.
Your US customer must pay more US dollars for the purchase. Your product has become more expensive for them.
Eurozone
Eurozone is the collective name for the countries of the EU whose currency is the euro. Trading with one of these countries is easy and attractive for a Dutch company. If you pay or are paid in euros, you do not have any currency risk.
Doing business outside the eurozone
Do you do business with countries outside the eurozone? Then the euro’s value against the other currency’s value determines if the import or export is cheaper or more expensive. The euro is also legal tender in countries outside the eurozone. Check with your foreign business partner if you can pay with the euro. This way you avoid any currency risk.
