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Limitations of Currency Transfers - effects on World Trade

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Limitations of Currency Transfers

Currency transfers are absolutely vital to a country’s economy. Transfers may be in the form of exports, imports, foreign direct investments or bilateral trade. The exchange rate therefore, sets the tone in determining the suitability of trade between nations. As such, exchange rates are keenly monitored as they have implications on not only movement of currencies across borders but also balance of trade between nations.
Countries with stronger currencies will therefore in effect have cheaper imports and reap maximally from their exports.Conversely, countries with weaker currencies will pay more for their imports whereas the exporters will be favored.
Currency transfers and by extension trade between nations are affected by some factors. Let’s delve deeper and have a look at some of them.

Terms of trade
The increase in price of exports for a particular country indicates an improvement in its terms of trade. A country with more exports therefore, implies greater demand for their products. Currency transfers will rise significantly in such cases. The Kenyan shilling, for instance, hit an all-time low of 107 against the dollar in 2011, which spelled doom to importers. Industries such as construction, petroleum and automobiles that heavily rely on imported material for their operations took a hit. The horticultural industry on the other hand flourished in view of the weakened shilling.

Public debt
Foreign investors are less apt to invest in countries with huge public debts. Public debt arises from public sector projects initiated by government or even government funding in the form of cash transfer schemes to the elderly or emergency disaster funding. Countries like Albania, Algeria or Armenia will most likely have little foreign cash reserves majorly due to reluctance by foreign investors to invest in their countries. Large public debt triggers inflation and governments may revert to issuing treasury bills and bonds but foreigners may be unwilling to buy into securities for a country that is too debt ridden.
A case in point is Zimbabwe with the Zimbabwean dollar.

Change in inflation levels.
The United States, Germany, and Japan are just some of the countries that have exhibited low inflation rates .This has an effect of strengthening their currencies. The purchasing power of these countries will in turn, be higher as compared to their counterparts. The US dollar, for instance, being the most traded currency and a standard measure means their foreign reserves will be huge. The dominance of their currency therefore, influences currency movement in their favour.
Countries with higher inflation rates on the other hand, denote a weaker currency and by extension an ailing economy. Movement of funds in such countries is at a bare minimal owing to this reality. The Somalian Shilling, Vietnamese Dong and the Turkmenistan Manat are just a few of the currencies that have suffered the worst inflations.

In summary, the movement of currency is determined by the trade conducted between nations. A nation that spends more on foreign trade than its earnings will therefore, have to borrow externally to make up for the deficit in their foreign cash reserves.

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