Currency Exchange

Definition: Currency exchanges take place whenever someone wants to buy a foreign good or service. For example, a Japanese firm who wants to buy U.S. lumber must first convert their Yen into U.S. dollars before the transaction can take place. Since floating exchange rates change over time, the firm will buy more lumber when the Yen is stronger compared to the U.S. dollar. The strength of a currency is dependent on many factors, including the rate of growth for the country's economy, target interest rates, and stability of government. Currency exchanges play a big role in developing countries, for a weakened currency will raise the price of all imported goods (including many foods and fuels). Moreover, currency fluctuations change the level of international debt owed by a country, as most IMF and World Bank loans are to be repaid in U.S. dollars. In order to encourage Sustainable Development, some countries fix their exchange rate to a larger currency (US$ or Euro) in an attempt to limit volatility. Unfortunately, this can sometimes create a bubble of underpricing that, when popped, can trigger huge market corrections and inflation. Alternative currencies such as Local Economic Trading Systems (LETS) and TimeHOURS ensure that money is kept within a local economy because it cannot be exchanged. Photo source

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