Currency Value: Understanding and Navigating Exchange Rates

Companies are increasingly selling their products globally. A startup in Spain might be targeting customers in the US, or a business in Argentina could be exporting to Asia. What used to be a complex process that was reserved for large companies is now accessible to small businesses and entrepreneurs thanks to digital platforms, e-commerce, and fintech solutions.

With this globalisation comes new challenges - and one of the most critical is currency.

When you’re dealing with international transactions, exchange rates can change daily, leading us to an important question: how do we know what’s happening with currency, and how does it affect the value of what we’re earning or paying?

It’s worth remembering that our currency has no intrinsic value.

Think about a $10 note. The paper it’s printed on is essentially worthless. The ink, the design, even the security features - they don’t make the bill valuable in themselves. What gives that $10 bill its purchasing power is the trust and confidence people place in the authority that issues it.

In the case of FIAT currency, that authority is the government. We accept and use money because we trust that others will also accept it, and because we trust that the government will manage it responsibly. Without that collective confidence, money loses its value.

This concept becomes especially important in international business. Different countries have different monetary policies, inflation rates, and levels of economic stability. A company selling overseas must understand not just the nominal price of a product, but also how currency fluctuations can impact profits, costs, and pricing strategies.

You can see this dating back throughout all of history, people have developed mechanisms to exchange value.

In the past, you might have exchanged 1 goat for 100kg of rice. The underlying principles of such exchange are not dissimilar to what we experience today.

So, in this article I share some tips on what to look out for when it comes to currency.

Why Does Currency Change Value?

Economic Indicators: One of the primary drivers of currency value is a country's economic health. Strong economic indicators, such as high GDP growth, low unemployment, and rising industrial production, tend to strengthen a currency's value. Moreover, foreign investors are attracted to strong economies, leading to increased demand for the country's currency.

Interest Rates: Central banks use interest rates as a tool to control inflation and stimulate or stabilise the economy. Higher interest rates attract foreign investors seeking better returns on their investments, leading to increased demand for the currency. Keep in mind though, if the interests are too high (Zimbabwe, Venezuela, Argentina), this rule does not apply.

Inflation: Inflation erodes the purchasing power of a currency. When a country experiences higher inflation compared to its trading partners, the value of its currency may decrease relative to theirs.

Trade Balance: The trade balance, which is the difference between a country's exports and imports, also influences currency value. A trade surplus (more exports than imports) tends to strengthen the currency, as foreign buyers need to purchase the domestic currency to pay for goods. Conversely, a trade deficit can lead to a weaker currency.

Political Stability: Political uncertainty and instability can significantly impact a currency's value. A country with a stable government and favorable policies is more likely to attract foreign investment, which bolsters its currency.

And why is it important to care about currency? (both as an individaul and business)

Keeping an eye out on the XE app can be a good thing to do.

Benefits Include:

Increased Purchasing Power: A strong currency gives individuals greater purchasing power, allowing them to buy more goods and services both domestically and from abroad. This means they can enjoy a higher standard of living and access a wider range of products without spending as much. This is also helpful when travelling abroad.

Education Opportunities: Studying abroad becomes more accessible and affordable with a strong currency. Tuition fees, living expenses, and other costs are relatively lower, enabling individuals to pursue higher education in foreign countries.

Investment Opportunities: Individuals with a strong currency can explore international investment opportunities more effectively. They can invest in foreign assets or businesses, diversifying their investment portfolios and potentially gaining from global economic growth.

Lower Imported Inflation: A strong currency can help keep inflation in check by reducing the cost of imported goods. This leads to a stable cost of living for individuals, making budgeting and financial planning more predictable. Example, Switzerland has reported 2022 inflation of 3.5%, the Euro zone reported 10.6% inflation.

Greater Savings Potential: When a currency is strong, individuals may have more incentive to save money since their purchasing power is protected against currency devaluation and inflation risks. Psychologically, it puts people into a savings mindset.

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Currency strength and stability

Currency strength is important, but currency stability is critical. This is because it adds for a layer of predictability that the money you are earning today will have relatively similar value, and therefore stable life implications later on.

Most stable currencies 2025

Most Stable Currencies

On the other side of the spectrum

The Argentinian peso (ARS) is one of the most well-covered faults of a local currency. Historically, there has been little domestic confidence in the longevity of pesos, and thus many Argentinians will ask for their salaries to be paid directly in USD, and if that is not a possibility, they will try to exchange their pesos to USD immediately.

However, not all Argentinians have the means to make fast transactions to USD, and therefore have suffered deeply.

Chart: XE

In August 2013, one US Dollar was worth 5.5 ARS. 12 years later, 1 USD is officially worth 1,400 ARS. That is 255x more.

This can have crippling effects for people who have spent decades working hard and saving, only to have their government fail them and their money useless.

I recommend watching this 6 minute clip from DW News (published June 2023) about the situation in Argentina.

Are decentralised currencies to the rescue?

This is a key reason as to why cryptocurrencies like Bitcoin caught traction in countries like Argentina and El Salvador - because the public felt that decentralised currencies could be more stable then their own local currency. Over the past years, it has been proven that Bitcoin was not the magic answer, but with governments failing to protect their citizens' money - can you blame them for trying something else?

In this graph below you can see observe the key difference between centralised and decentralised currency.

Difference between centralised and decentralised currency

This means that the definition of value are opposites.

Fiat currencies are defined by the inside, out. Government actions will determine the value of the currency.

Cryptocurrencies are from the outside, in. Governments cannot affect the price of bitcoin, because it the price is dictated by what people think it should be worth, and how widely accepted it is in society.

In recent years, many people have shifted their attention away from cryptocurrencies and back to fiat currencies.

This shift occurred because the cryptocurrency industry struggled to offer the stability that many individuals were seeking. However, the concepts of blockchain and decentralised currency continue to be important - and could potentially experience a surge in popularity in the near future.

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These days, we’re all more connected than ever, and that makes understanding money really important.

Exchange rates can affect what we earn, what we spend, and how far our money goes - whether we’re buying groceries at home or selling products overseas.

A currency is only as strong as the trust people have in it. When that trust drops, things can get tricky. People scramble to protect the value of their money, and even everyday purchases can become stressful.

Cryptocurrencies popped up as an alternative, giving people a way to move money outside of traditional systems. They’re not perfect, but they’ve definitely made people think about what gives money its value.

For both individuals and businesses, keeping an eye on currency trends is smart. Understanding how things like inflation, interest rates, and global trade affect money can help you make better financial choices.

At the end of the day, money works because people trust it.

Whether it’s cash in your wallet or a digital coin online, it's the trust in it that keeps the world spinning.