The world's economic system completely depends upon foreign exchange rates. Having said that, it is essential for all business enterprises to understand and learn how it operates. Bottom line is, foreign exchange rates will affect businesses. It is like a thermometer that gauges the health of local and global economics.

Before getting into the meat of the details, it is first better to know by definition what foreign exchange rate is. Simply stated, foreign exchange rate is the comparative value of one nation's currency with another country. In other words, if I take one US dollar and compared it to British Pounds, the dollar would be of lesser value because the US currency is less than the UK currency.

The principle of supply and demand primarily dictates the fluctuation of the currency exchange rates and creates a ripple effect on global business. This is called a floating exchange rate. A floating exchange rate simply means that the currency's volatility depends on how much commodities are being demanded by one country in comparison to another. Because of this, it is the global market that determines a country's monetary value.

The government can also play an important role in global currency exchange rates. A lot of governments will sometimes impose certain actions that will purposely increase the value or devalue their currency. This action seems contradictory at first, but at a closer look, it is not. By reducing their own currency, they allow the country to increase its demand for supplies. It is also analogous to a store who puts up a sale in order to attract more buyers. This form of activity has been proven effective by some countries. By doing so, some countries have attracted a montage of foreign investors, which in turn boosted the country's local retail market, tourism, banking, manufacturing, and construction. With such an infusion, a country's economy can be revived.

In local businesses, foreign exchange rate still plays and important part. Investments, jobs, revenues and international payments are all dependent of foreign exchange rates. It is vital in determining a country's competitive advantage, and thus impacts the local economic outlook.

To put things in better perspective let's elaborate on an example. If a US product is cheaper than the product of Japan, given all things equal in quality and standards, other countries will flock into the US to buy their product and not to Japan. Since both products only differ on price and not quality, this is mostly a result of currency changes. The US currency has shifted down, allowing other countries to have cheaper access to their goods. As a result, local businesses thrive and the economy is given a boost.

By identifying other countries where the currency is stronger these differences in the market can be exploited. By quoting for tenders in other parts of Europe an advantage can be had over businesses localised to the tender.