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How Functional Currency is directly related to Exchange Rate?

  • September 2014
  • Posted By Ninoslav

Deficit of functional currency might have a huge effect on trade and business. And why not, after all capital is most important to kick off any business. International trade which unites two different countries and binds them together can sometimes prove to be huge loss due to fluctuation of international currency.

Factors that influences currency fluctuation:
Currency fluctuation is one of the most dangerous factors in international business. To deal with it exchange rate regimes i.e. flexible exchange rate, fixed exchange rate and managed exchange rate has been formulated. Countries adopt their respective currency exchange method depending on their socio- economic condition.

The factors that influence the decision of adopting currency exchange are as follows:

  • Trade flow between countries reflects demands for goods and services of a country
  • Government policies like tax policy, labor policy influences countries to decide on the exchange rate.
  • Economic countries like wars, political instability and other economic and social factors shifts and affects exchange rate.

A countries government influences changes in exchange rate both intentionally and unintentionally, such changes are brought to stabilize the economic condition.

Earning profit depend not only a business’s products or the kind of prices it sets. It depends on various external factors as well. Primary currency places a huge impact on business. This primary currency is directly related to the level of business. Overall performance of business increases and decreases profit margin. If a business performs well they have higher chance to expand business and if it fails to achieve their goal they are more likely to fail.

Functional currency if earned and invested well brings a positive change not only for business house but also brings an overall change in countries economic condition. When people have pledged to save themselves by following tips on “How to save yourself from foreign exchange fraud?” better economic condition would give them more reasons to smile.


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