Impact of Exchange Rates on Businesses in Nigeria

As a business person, you need to know the current exchange rate among the nations. A day trader is not the only one who gains profit from these exchanges. Even regular businesses can benefit from having a strong currency.

What is the Exchange Rate and why Is it Important

In short, it is the rate of one currency against another. It affects trade and how the country makes a financial move. Several things influence the rate such as the regulations, economic disturbance, and global issues.

A business needs to know this rate as they need to set the budget to work with other businesses. Even when they only work with local companies, the global trading rate will still affect them.

Several rates are floating which means it may fluctuate with the global market. Other rates are fixed against the local currency. For example, the HKD is pegged at 7.75-7.85 for 1 USD. This means, that the rate for 1 USD in Hong Kong will stay within the 7.75-7.85 HKD range.

How to Use The Rate?

The easiest example to use the rate is when you travel abroad. For example, upon returning from Japan, you carry 100 USD in your pocket. The rate of USD and JPY is 100 Yen for 1 USD, while 1 JPY is 5 Naira. If you trade your USD in Japan, you will receive 50000 JPY. And when you return to Lagos, you must exchange the Yen back to Naira and receive roughly 260,000 Naira. To compare, if you carry the USD back to Lagos, you may get 700,000 Naira instead.

The practice is similar in a business, especially if you work with a foreign company and use USD as the main currency. When the Naira is strong and keeps 1 USD under 600 Naira, you can gain more profit as the exchange rate is in your favor.

However, when there is an issue the Naira value continues to contract and stay above 700 Naira or more. You may have to raise the price and cut some corners to keep the profit going.

Why USD Counts

Compared to the British Pound and the Kuwaiti Dinar, the United States Dollar is not the most valuable currency in the world. However,  the country’s economy brings the currency to a more prominent light.

At the end of World War II, the United States managed to put USD as the international reserve fund. This led to a global demand for USD and many countries to this day agree to use USD as the primary currency. In addition to the diplomacy tool, the American government also could borrow money with USD as collateral.

However, several countries or groups of countries are working to have a unified currency to help the region’s economy. Euro in the European Union is a good example of this practice. It doesn’t diminish the USD to trade, but the nations have more flexibility, including a standardized currency for the region.

We would like to hear more about your opinion on the current exchange rate. Even more so if you’re a business owner and looking for the best business strategy when there is a global economic issue. If you have a specific strategy, don’t be shy and write them down in the comment.