The decline of a currency is when its value becomes low compared to other currencies in the foreign exchange market. An example of a currency decline is the Canadian dollar compared to the US dollar. A single US dollar can purchase a more considerable amount of Canadian dollars at the set exchange rate. Currency decline can result in investors shifting to other currencies of higher value, leading to a currency collapse. In the United States, the recent decline of the dollar value has negatively affected Canadian export companies in different ways.
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Effects of Recent Decline in The United States Dollar on Canadian Exporting Companies
A decline in the US dollar has led to the fall of currency exchange, leading to an increase in imports and a decrease in exports. Canada is one of the regions that exports goods to the United States; hence, declining of the Us dollar has negatively affected Canadian exporters (Chen et al., 2017). Some of the effects of the Us dollar decline on Canadian companies are the fall of exports and the loss of market for their products.
Exports fall results from price increases in a variety of goods resulting in a decrease in the quantity demanded. For example, a Canadian company exports hockey sticks to the US for 10 CAD each. Before the US dollar declined, it could cost American retailers $5 each per stick because $1 was worth 2CAD. After the US dollar declined, the American companies had to pay double, that is, $10 for the same hockey stick. After the decline in the US dollar value, Canadian companies have increased the prices of their goods to retain their income, therefore reducing the number of sales they make (Chen et al., 2017). This will force the American companies to look for cheaper alternatives from other exporters leading to a loss of market for the Canadian companies.
Loss of Market
Loss of market for Canadian products in the US marketplace will be due to the rise in competition from other foreign exporters. The competition will be based on the set prices for that specific item in the market (Eidlin, 2018). A decline in the US dollar will affect both Canadian and foreign companies differently based on their currency value to the US dollar (Chen et al., 2017). For example, a Canadian company exports shirts to the United States for $5 each. Another European company exports the same type of shirts to the US at the same price. When the US dollar declines, the Canadian company will be affected negatively since the Canadian dollar is of low value compared to the US dollar. Therefore, due to the effect of the currency exchange rate, the Canadian company will have to hike the price of its shirts to maintain the revenue they get from that specific item. The European company will not be negatively affected by the US dollar decline since the euro currency value is higher than the US dollar (Eidlin, 2018). Hence, it will take advantage of the decline and supply more shirts at the same price, bringing higher competition to the Canadian Company.
The bank exchange rate determines the relationship between two currencies. In most regions, a decline in certain currencies will negatively affect the value of another currency. The current US dollar decline has negatively affected Canadian companies by reducing export quantities and higher competition from regions with higher currency value than the US. Therefore, to minimize these effects of currency decline, Canadian companies can overlook regions with higher currency values to export their products in those areas. By doing that, even if the currency of that specific country declines, it will not affect the company that much. Canadian companies can benefit from the US dollar decline by increasing the number of imports rather than exports.
Chen, Z., Devereux, M. B., & Lapham, B. (2017). The Canadian border and the US dollar: The impact of exchange rate changes on US retailers. Canadian Journal of Economics/Revue canadienne d’économique, 50(5), 1525-1555.
Eidlin, B. (2018). Labor and the class idea in the United States and Canada. Cambridge University Press.
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