Intuitively, it would seem logical to prefer a “strong” currency, right? But in reality, the answer is not so simple and actually depends on how it will be used. Using money for international activities, such as taking a vacation, is really one of those “good news–bad news” situations.

Consider the value of the euro versus the U.S. dollar, as exchange rates fluctuated for those currencies between the ten-year period 2002 and 2012. As a citizen in one of the euro-area countries—for example, France—suppose you were going to take a vacation to the United States in 2002 but, instead, you chose to delay that vacation until 2012. Now, compare your vacation costs if you had gone in 2002 versus 2012, based on currency exchange rates at those times. Each euro in 2012 paid for about $1.45 of the trip (based on currency exchange rates at that time). However, each euro would have covered only $0.87 in 2002 (based on prevailing exchange rates). That’s the good news: The stronger euro in 2012 meant more purchasing power against the weaker dollar for French vacationers. It’s bad news, though, for French innkeepers because Americans could go elsewhere to avoid expensive European travel that requires $1.45 to pay for each euro of vacation cost, up from only $0.83 to pay per euro ten years previously. Simply put, that $0.83 cup of coffee at a French sidewalk café in 2002 cost $1.45 in 2012. Since 2012, though, the euro has declined in value relative to the dollar and in 2017 was about the same level as in 2002. As a result, it was again less expensive for the French to travel to the United Status.

In terms of trade, the strong euro in 2012 proved to be a stumbling block for Europe’s economy, especially for industries that export to non-euro countries with weaker currencies. Prices (in U.S. dollars) had to be increased, for example, on German-made Mercedes and BMW auto exports to the United States to cover the higher euro-based manufacturing costs, causing weaker U.S. demand and sales. Although the weaker dollar hurt many European firms that export products to the United States, others gained by increasing their U.S. investments. When Mercedes-Benz, for example, produces Mercedes M-class autos in Alabama, it pays in weaker dollars for manufacturing them, exports cars to Europe, and sells in euros for windfall profits. On balance, however, many euro-based firms faced sagging sales, with slower revenue growth the result of a strong euro. Again, though, as the euro weakened, those same firms have seen their foreign revenues begin to grow.

In managing the money supply and interest rates, the Fed strongly influences the dollar’s strength against other currencies. The European Central Bank (ECB) has the same role in the euro zone. The raising of interest rates tends to increase an economic system’s currency value, whereas lowering the rate has the opposite effect. Europe’s economic recovery is slower than desired when the euro is strong because euro-zone companies are less competitive against global counterparts. Even so, the ECB had refused to weaken the euro by cutting interest rates, even while the euro region was well into the global recession. With lower rates, the supply of euros would increase, and the price of euros would fall, stimulating Europe’s economy. But the ECB fears it would also stimulate too much inflation. ECB finally cut interest rates to a record low 0.5 percent in 2015 as the euro region remained in recession. The rate cut was followed by a decrease of 1 percent in the value of the euro on world currency markets.²⁴

In contrast, the U.S. Federal Reserve continues with low interest rate policies to stimulate the ailing economy and in doing so contributes to a relatively weak dollar. The weaker dollar makes U.S. goods cheaper and more attractive on the world’s markets, thus maintaining or even increasing U.S. export sales. At the same time, the weaker dollar makes foreign imports more expensive, so U.S. consumers can afford fewer imported products, many of which are available only from foreign manufacturers. Some must-have commodities, too, such as petroleum, are priced worldwide in U.S. dollars, so as the dollar’s value falls, the price of oil increases because it takes more of those weaker U.S. dollars to buy each barrel.²⁵ We see, then, some of the ways that banking and banking policies significantly influence currency values.

Compounding the uncertainties facing foreign exchange is Britain’s exit from the European Union. Unlike other EU members, Britain never dropped its traditional currency in favor of the euro. But economists, government officials, and business leaders all have a difficult time in predicting how Britain’s departure will affect its own international trade, international trade of the EU, and the ripple effects of the major trading partners of both Britain and the EU member nations. Consequently, foreign exchange rates for both the British pound and the euro are likely to fluctuate more than usual over the next few years.

Why care, then, about currency exchange rates? Currencies matter greatly to companies when they buy, sell, and invest with other companies around the globe. Individuals, too, have similar concerns, as when farmers buy grain from Brazil and tractors made in Japan or India, sometimes at higher prices and other times at lower prices, depending on the currency exchange rates of the countries involved. Those exchange rates can be the difference between making a living and losing money during any year. Prices for consumer products, such as electronics by Samsung and autos made in Sweden or Germany, depend on currency exchange rates, too. As an investor looking toward retirement, you may buy an individual retirement account (IRA) in the T. Rowe Price European Stock Fund, or alternatively invest in any of the many other global opportunities for accumulating wealth to meet future needs and dreams. In all of these endeavors, the success or disappointments in your decisions—if and when to buy and to not buy—will be influenced by changes in currency exchange rates. Likewise, as a potential entrepreneur, your business success will be determined, in part, by changes in currency exchange rates.