In Chile, the currency has appreciated against those of its trading partners, which reduces demand, which reduces price:
Chile ... has seen weak commodities hit the currencies of its two large export markets — Brazil and Russia. Brazil’s real plunged 34 per cent since the beginning of last year while the Russian rouble lost 25 per cent.
In Norway, however, the plunging oil prices have depreciated the krona against currencies of its trading partners, which increases demand, which increases price:
In Norway, the krone has weakened 16 per cent against the dollar since the start of 2015 and 6 per cent against the euro, increasing revenues in the local currency for farmers who were forced to cut prices in the wake of the Russian food import ban in 2014.
Changes in foreign exchange rates result from changes in supply and demand. Currencies are bought and sold much like any other commodity. The demand for currencies usually results from the demand for a country’s exports, but can also be the result of investors looking to make a profit on changes in currency values. This can also be due to an increase in interest rates, making the currency an attractive investment, thus increasing the demand for the currency.
ReplyDeleteWhen currency appreciates, demand decreases, and prices of export goods drops. Conversely, when currency depreciates, demand increases, and prices of export goods goes up. In the salmon price example, because the Chilean currency was worth more than the currencies of its export markets, demand decreased, forcing the reduction in salmon price. In Norway, the opposite occurred, the currency was worth less than the currencies of its export markets, increasing demand, which in turn increased the salmon price.
It is a balance of supply and demand. Low demand produces over-supply, which causes reductions in price. High demand can produce a shortage in supply, which causes increases in price. Both scenarios have an impact on local economies.
Economics Online. (n.d.). Retrieved February 29, 2016 from http://www.economicsonline.co.uk/Competitive_markets/The_foreign_exchange_market.html