If one is living abroad and being paid in a currency that is stronger than the local currency, after paying ones local expenses in local currency, one can save more. Similarly, if one manufactures a competitive item for a cost effective price, in local currency, and sells it in a stronger currency a greater profit is possible.

Let's run the numbers for these two cases:

Case 1

  • Monthly living expenses in Deutsche Marks (DM prior to 1 Jan '99) = 2,000


  • Exchange rate: 2 DM to 1 USD


  • Resultant monthly living expenses in USD = 1,000

  • Exchange rate: 1 DM to 1 USD


  • Resultant monthly living expenses in USD = 2,000

Case 2

  • Production cost in Deutsche Marks (DM prior to 1 Jan '99) for a hypothetical product = 1,000 DM = manufacturing cost + labor cost + overhead cost + profit cost


  • Typical product pricing in USD, for hypothetical product = 1,000


  • Exchange rate: 2 DM to 1 USD


  • Production Cost in USD = 500 USD. Potential additional profit per item, 500 USD

  • Exchange rate: 1 DM to 1 USD


  • Production Cost in USD = 1,000 USD. Potential additional profit per item, 0 USD


In a real world example of the effects of currency fluctuations from this year, recall that the Swiss Franc was acting as a 'haven currency' due to the low political and economic risk associated with Switzerland.

Due to the resulting currency appreciation, Swiss manufacturers were having difficulties selling their products globally, for a profit. On 6 September 2011 the Swiss National Bank pegged the Swiss Franc to the Euro at 1.2 Swiss Francs to the Euro. This means that the SNB may be printing money in order to devalue the Franc to maintain this peg.

The Economist ran an informative article regarding the effects of currency interventions entitled How to Stop a Currency War on 14 Oct, 2010