Question

Why and how do exchange rates influence corporate investment decisions? Corporate financing decisions

Answer 1

Changes in exchange rates do not seem to influence most people in their daily lives, but indirect effects are larger than many people know.
The prices of imported goods can increase in value as exchange rates adjust, including domestic products that depend on imported parts and raw materials.
Exchange rates also have an impact on investment performance, interest rates and inflation-and can even extend to affect the job market and the real estate industry.

A weak domestic currency, due to higher prices for foreign goods, can push up inflation rate in a nation that is a major importer. This may cause the central bank to increase interest rates in order to combat inflation, as well as to support the currency and prevent a sharp drop. A strong currency, on the other hand, depresses inflation and drags the economy, which is tight monetary policy. In response, the central bank of a nation could move towards holding interest rates low or further growing them to prevent the domestic currency from being too high.

Fluctuations in the exchange rate can have a significant impact on your investment portfolio, even if you only hold domestic investments. The strong dollar, for example , typically dampens global product demand, because it is priced in dollars. This lower demand can affect earnings and valuations for domestic commodity producers, though the weaker local currency will mitigate part of the negative effect.

A strong currency can also impact revenue and income received overseas; many U.S. multinationals have been attributing a hit to the top-line and bottom-line due to a stronger dollar in recent years. The effect of exchange rates on portfolio returns is obviously well known. Investing in securities denominated in an appreciating currency may raise total returns, whereas investing in securities denominated in a depreciating currency may trim total returns.