Do you know how foreign exchange rate affect investment?

By Nipapun Poonsateansup, CFP® Dependent Financial Planner

If anyone has followed the economic news on a regular basis, would have heard. 'Thai baht strengthens' or 'baht weakens'. Have you ever wondered what it means by baht is weak or strong, why it matters for us and how will it affect our investment? Find the answers in this article.

First, get to know the word “foreign exchange rate.”

Foreign Exchange Rate is the price of one currency relative to another currency. The main components of the exchange rate are two parts: local currency and foreign currency. The price can be displayed in two ways.

First, the foreign currency is displayed in local currency and the second type is the local currency expressed in foreign currency. For example, US $ 1 is 33 baht. In return, US $ 1 is US $ 0.03.

Factors that affect the exchange rate are interest rates, economic growth, and currency trading needs. This can be explained as follows.

  • Interest rate: High-interest rates will pull in the money flowing into the country. By nature, money flows from low-yielding to high-yielding. Where are the high returns? Short term money will flow to that. As a result, currencies with high-interest rates appreciated. If money flows in, the value of money will be quite strong.

  • Economic growth: this factor will reflect that country with stronger economy or have a better growth rate, the central bank is likely to raise interest rates to help curb the expansion of inflation. And from the above-mentioned factors that Higher interest rates will attract more foreign investment and the demand for money is quite high will it makes the value of money more as well.

  • Currency Trading Needs: It affects the exchange rate. The money flowed from the trade, export and from foreign tourists arriving in the country. How does the flow of money into this country affect the baht? The answer is that transactions in Thailand require a baht so foreign currency flows are exchanged into Thai Baht. When the need to buy (the baht) from exporters or tourists. The baht will be stronger or more expensive.

Exchange rates have both positive and negative impacts on the Thai economy. This may result in the country losing its competitive price (because the baht is more expensive) or the export value converted into Baht decreased, continuing to the wages of workers in export-related businesses. It may slow down economic growth. For example, the export business has a profit from the sale at $ 1 million, if the exchange rate is 33 baht per US dollar, the business will be back in the country at 33 million. If the baht appreciates to 30 baht per US dollar (the baht is stronger, the less money is spent on foreign currency exchange), the business will be left with only 30 million baht back in the country. Export and travel businesses will prefer week money over string money.

However, on the contrary. A stronger exchange rate will help reduce the cost of imported raw materials and it also helps slow down the cost of living, especially in the period when energy price in the world market grows rapidly. For instance, the business needs to import goods from abroad and assume that the cost of goods is $ 1 million. If the exchange rate is 30 baht per US dollar, businesses must pay the cost of importing goods at 30 million baht. However, if the baht is depreciated to 33 baht per US dollar, the business will have to pay the cost of goods up to 33 million baht. Business must pay 3 million more. Therefore, for businesses that import goods from abroad, they prefer a stronger baht than week baht.

Exchange rates are what the export/import business operators face.
By changing the exchange rate, the income or expenses in the Thai Baht will be uncertain and this may cause additional profit or loss. However, the volatility of the exchange rate is hard to predict because there are many factors that affect the movement of exchange rates like, the economic fundamentals in the country, monetary and fiscal policy, the world economy, forecasting and speculation, political instability in the country and abroad, market psychology and rumors.

Although the business cannot control the exchange rate fluctuations, it can manage the exchange rate risk using the appropriate tools for hedging, such as foreign currency forward contracts. To be able to manage revenue and costs more efficiently.

In summary, monetary or exchange rate is one factor that affects the rate of return on trade and investment. Understanding the exchange rate and tracks the changing situation, find out more information or expert advice, will help businesses related to international trade, the business sector expanded to foreign countries and including the people who invested in securities or foreign assets can adjust to maintain the return on investment and can prevent or reduce the risk of exchange rate.