Strong and Weak Currencies: Winners and Losers

When a currency appreciates, a country's exports become more expensive abroad and imports become cheaper at home; when it depreciates, the reverse happens. A weaker currency can therefore help exporters and tourism but raises the cost of imported food, fuel and machinery, hitting households and firms that depend on them. The effect on the trade balance is not immediate: in the short run, existing contracts mean a depreciation can even worsen the balance before volumes adjust, a pattern called the J-curve.

Countries that borrow in foreign currency face an added danger, since depreciation increases the local-currency cost of their debts. This is why a fall in the currency can trigger a crisis for some emerging economies but a welcome boost for others. Governments accused of keeping their currencies artificially weak to gain export advantage face charges of 'currency manipulation', a recurring source of international tension.