How can fluctuations in currency impact businesses?

Fluctuations in currency can significantly impact businesses primarily through changes in the cost of imported and exported goods. When a country's currency weakens, imports become more expensive, as more local currency is required to purchase the same amount of foreign goods. Conversely, if the currency strengthens, imported goods become cheaper. This directly affects profit margins, pricing strategies, and ultimately, the competitiveness of products in the market.

For businesses that export goods, a weaker domestic currency makes their products less expensive for foreign buyers, potentially increasing sales in international markets. However, fluctuations can create uncertainty in pricing and profitability, making budgeting and financial forecasting more challenging. Therefore, understanding and managing the impact of currency fluctuations is crucial for any business involved in international trade, as it influences not only costs but also cash flows and overall financial health.