Currency exchange rates have a significant impact on the country’s foreign trade

1 november 2016 | RT

The Swiss franc’s been falling since early October. The Swiss National Bank plans to stabilize the national currency’s exchange rate by managing it ‘manually’. The new monetary reform may cost the country EUR 561 billion. "The weakening of the national currency results in an increase in the total output of goods and services, however, the effect of fluctuations varies from industry to industry: in some sectors output is growing fast and imports are being replaced with domestically sourced goods and services, while in other sectors the effect from a weaker national currency is not as great and may even be negative," said the Deputy Head of the Department for Macroeconomic Studies of the Analytical Center Ekaterina Grigoryeva, commenting on the situation for RT.

Ekaterina Grigorieva
Ekaterina Grigorieva
Department for Macroeconomic Research

The expert noted that currency exchange rate have a significant impact on a country’s foreign trade and balance of payments, influencing the balance between import and export prices, the competitiveness and profit of companies.

"On the one hand, the national currency’s devaluation have an adverse effect on the national output’s dynamics because of the real household income decrease due to higher prices of imported goods and services, producers’ cost increase for imported semi-finished goods and cost escalation of their obligations in foreign currency," Ms Grigoryeva said.

On the other hand, a weaker national currency stimulates import substitution and can thus lead to an increase in national output as a result of lower cost of domestically manufactured goods relative to imports, the analyst explained. "The change in the nominal currency exchange rate also affects the revenue in the national currency that exporters make and thus can serve as an incentive to produce more for export," Ms Grigoryeva concluded.

Source: RT