GENEVA — Fluctuations in exchange rates may lessen demand for differentiated products like fashion items, while having a reduced impact on commodities, according to an International Monetary Fund report released this week.
Although minor changes have a “fairly small” effect on trade, the study found that major swings in rates, such as those caused by the Asian economic crisis of 1997, can significantly distort trade.
Heiner Flassbeck, chief economist at the U.N. Conference on Trade and Development, said major exchange-rate variations may take a heavy toll on countries that see the value of their currency dramatically transformed. He said firms “may be thrown out of the market even if they are more productive [than competitors], before they can react.”
The 1997 currency collapse made the apparel and textile exports of many Asian nations less expensive than normal, as consumers in those countries were experiencing an erosion of their purchasing power. This prompted a surge in exports to the U.S. that set the stage for a round of major textile bankruptcy filings. The rising strength of the euro compared with the dollar has had a smaller, but still noticeable, effect on the sales of European luxury-goods companies.
The report did not address the issue of fixed exchange rates, such as China’s controversial peg of 8.28 yuan to the U.S. dollar. Some economists have argued that this rate fix undervalues the yuan by as much as 40 percent, artificially lowering the price of Chinese exports.
The study also noted that the practice of using financial hedging instruments “could reduce firms’ vulnerability to risks arising from volatile currency movements.”
— John Zarocostas