Exchange Rates and Currency Exchange

An analyst on Global News is discussing how the Canadian dollar has strengthened against the US dollar. Your first reaction is that a strong Canadian dollar ought to be good thing, so hearing that this change might hurt Canada's exports, you wonder how that could be.

Currencies are actively traded in the international marketplace, which means that exchange rates are changing all the time. As such, exchange rates rise and decline. A currency appreciates (or strengthens) relative to another currency when it is able to purchase more of that other currency than it could previously. A currency depreciates (or weakens) relative to another currency when it is able to purchase less of that other currency than it could previously. Take a look at two examples illustrating these concepts:

• EXAMPLE 1: If $C$ 1$ buys $US$1.02$ and the exchange rate rises to $US$1.03$, then your $C$ 1$ purchases an additional penny of the US dollars. Therefore, the Canadian currency appreciates, or strengthens, relative to the US dollar.
• EXAMPLE 2: Similarly, if the exchange rate drops to $US$1.01$, then your $C$ 1$ purchases one less penny of the US dollars. Therefore, the Canadian currency depreciates, or weakens, relative to the US dollar.

These concepts are particularly important to international business and global economies. Generally speaking, when a currency appreciates it has a positive effect on imports from the other country because it costs less money than it used to for domestic companies to purchase the same amount of products from the other country. However, the currency appreciation tends to also have a negative effect on exports to other countries because it costs the foreign companies more money to purchase the same amount of products from the domestic companies.