Currency Appreciation: What It Means for Your Imports and Exports

What is currency fluctuation? Currency fluctuation is the change in the value of one currency compared to another. For example, if $1 = £2, and then eventually $1 = £3. This illustrates currency fluctuation, which may take place in two forms: appreciation and depreciation.

Now you may be wondering, “Oh well, my aim is to run a business profitably. Why should I care about all these fancy terms?” Any successful business must understand these concepts to make effective decisions. And that is why we’re here to help you.

Now, over to the basics: Appreciation is when a currency’s value increases relative to another currency. Like the example above, the US dollar appreciated, now being able to buy more of the UK pound. One of the core components linked with currency fluctuation is imports and exports. In the case of appreciation, since $1 could previously buy £2 and then later £3, it means imports will now be cheaper. A more realistic, easy-to-understand example is as follows:

Anthony imports sweets and sells them in his local market. The economy has been boosted, leading to currency appreciation. Now that Anthony’s local currency has appreciated and become stronger, for the same amount, he is able to import MORE sweets. This will increase the profitability of Anthony’s sweets business. The key point of realization is that if Anthony did not understand the basics of currency fluctuation, he wouldn’t have been able to avail this profitability boost.

On the other hand, let’s say Ayaan, a cotton exporter living in Pakistan, faces a similar situation. His country’s currency also appreciates. However, the benefits that Anthony received as an importer are not the same for Ayaan, even though both individuals’ currencies appreciated. In Ayaan’s case, currency appreciation poses challenges for exporters by making their products more expensive in foreign markets.

Before Currency Appreciation:

Ayaan sells 1 unit of cotton to the US for 100 USD. The exchange rate is 1 USD = 167 PKR. So, Ayaan gets 100 USD × 167 PKR = 16,700 PKR for 1 unit of cotton.

After Currency Appreciation:

Now, the Pakistani Rupee appreciates, and the exchange rate changes to 1 USD = 150 PKR. Ayaan still sells 1 unit of cotton for 100 USD, but now he gets 100 USD × 150 PKR = 15,000 PKR for 1 unit of cotton.

Result:

Before appreciation, Ayaan earned 16,700 PKR. After appreciation, Ayaan now earns 15,000 PKR. Ayaan loses 1,700 PKR because of the stronger Rupee.

Before the Rupee appreciated, foreign buyers (from the US) paid 100 USD, and Ayaan got 16,700 PKR for that cotton. After the Rupee appreciated, foreign buyers still pay 100 USD, but Ayaan now only gets 15,000 PKR for the same cotton.

So, even though the foreign buyers are still paying 100 USD, Ayaan receives less money in PKR because the Rupee has become stronger. This means foreign buyers aren’t getting the same value they did before — they’re essentially paying the same amount in USD, but now Ayaan’s cotton costs them more in PKR terms. It’s a problem for Ayaan as an exporter because he gets less money for his cotton. And for foreign buyers, as they don’t get as much cotton for their money as they did before because the currency change makes the cotton more expensive in local terms (PKR).

So, it’s not just bad for Ayaan, it can also make his cotton less competitive in the global market.

Now that we’ve covered how currency appreciation affects importers and exporters, in the next article, we’ll dive into the flip side: how currency depreciation impacts importers and exporters.

Written by Daniil Eremin