Exchange rates’ volatility requires from the companies involved in international trade to keep a special attention to the dynamics of currency exchange rates with a view to make effective pricing decisions.
Especially during economic sharp upturns and downturns, when currencies start to fluctuate, including the exporting country and importing country currencies, one of the most critical issues for the companies becomes to effectively react on those fluctuations. Though, according to Devereux and Engel (2003) it would be optimal for international businesses to have fixed exchange rates, it is not often the case, the exchange rates fluctuate.
For exporting companies the most favorable conditions are when a national currency is week. Gali and Monacelli (2005) demonstrate the case which implies that in countries with weak currencies, what seems good for the exporters, the exchange rates fluctuations are usually high, what decreases the favorability of the situation. Currencies often have inflations at those times, and it implies additional difficulties, as to prognosing that inflation, planning pricing policy, and making urgent decisions when situation changes abruptly.
In the example by Taylor (2009) the financial crisis in August of 2007-2008, which touched the whole world, especially South America and Asia – important strategic US trading partners, the exchange rate sharp changes caused the change in the structure of trading in general. For example, the exporting companies in countries with weakened currency have got the advantage.
It may be concluded that companies involved in export and import operations should set their pricing policies by taking into consideration the exchange rates’ changes.
1. Devereux M.B., Engel C. (2003). Monetary policy in the open economy revisited: Price setting and exchange-rate flexibility. The Review of Economic Studies.
2. Gali J., Monacelli T. (2005). Monetary policy and exchange rate volatility in a small open economy. The Review of Economic Studies.
3. Taylor J.B. (2009). The financial crisis and the policy responses: An empirical analysis of what went wrong. National Bureau of Economic Research.