Exchange rate dynamics and their impact on economic decisions.

December 2025 by André Themudo

The exchange rate is one of the most important economic indicators, with a direct impact on prices, investments, international trade, and the competitiveness of companies. In simplified terms, it represents the value of one currency in relation to another; For example, it allows you to identify how many euros are needed to buy one US dollar.

When the exchange rate depreciates, it means that the euro loses value against a foreign currency, making it necessary to spend more euros to buy the same amount of dollars. This movement makes imports more expensive and can put pressure on inflation. Conversely, when the exchange rate appreciates, the euro gains purchasing power, making imported products more affordable, although this may reduce the competitiveness of exports.

The importance of the exchange rate is therefore transversal, since it influences the cost of imports, the price of exports, the purchasing power of families, the results of companies and even monetary policy decisions. Small variations can affect the profitability of exporting or importing companies, as well as the investment decisions of national and international investors.

There are two main ways to measure the exchange rate: nominal and real. The nominal exchange rate corresponds to the direct quotation between two currencies, as it is published in financial markets, for example, 1 euro = 1.10 US dollars. The real exchange rate adjusts this relationship taking into account inflation differences between countries, more accurately reflecting the relative purchasing power of each currency. This is the best indicator of whether a currency is overvalued or undervalued in economic terms.

Exchange rate regimes

Countries can adopt different exchange rate regimes, depending on the degree of intervention by monetary authorities in the market. 

In a fixed exchange rate regime, the value of the national currency is pegged to another currency or a basket of currencies, for example, the dollar or the euro, and the central bank intervenes whenever necessary to keep the rate within predefined limits. This model favors stability and predictability, but limits the autonomy of monetary policy and requires the maintenance of high international reserves. In a flexible exchange rate regime, the value of the currency is freely determined by the law of supply and demand in the foreign exchange market, adjusting to internal and external economic conditions. Although this system provides greater flexibility to monetary policy, it can also lead to greater volatility in exchange rates.

There is also the exchange rate band system, an intermediate model that establishes minimum and maximum limits for the exchange rate. Under this system, the central bank intervenes only when the exchange rate threatens to exceed these limits, allowing for some stability without completely eliminating market flexibility.

Impacts on businesses and consumers

Exchange rate fluctuations have significant effects on the real economy. For exporting companies, a devaluation of the national currency can be advantageous, as it makes their products more competitive in foreign markets. On the other hand, for importing companies, the same situation increases the cost of raw materials and equipment purchased abroad, putting pressure on production costs.

Consumers also feel the impact of exchange rate fluctuations. When the euro depreciates, imported products, such as fuels, electronic equipment, or food items, tend to become more expensive, contributing to inflation. The opposite happens when the euro appreciates against other currencies.

Influence on inflation and interest rates

The exchange rate directly influences the overall price level of an economy. Currency devaluation increases the cost of imports, having a direct effect on inflation. It can also produce indirect effects by stimulating exports and growth in domestic demand. However, if there is no proportional increase in supply, this situation tends to put even more pressure on prices. For this reason, central banks closely monitor exchange rate developments when setting monetary policy. Higher interest rates can attract foreign capital and strengthen the currency, while lower rates can reduce capital inflows and lead to its devaluation.