How does a strong currency impact imports and exports?

A strong currency makes imports cheaper and exports more expensive due to the relative value it has against other currencies. When a domestic currency appreciates, consumers and businesses can buy more foreign goods for the same amount of money, making imports cheaper. This leads to an increase in imports as consumers take advantage of the lower prices of foreign products.

On the other hand, exports tend to become more expensive for foreign buyers because they have to convert their local currency to purchase goods priced in a stronger domestic currency. This can result in a decrease in demand for exports, which may negatively impact the trade balance.

Understanding these dynamics is crucial in international trade scenarios, as a stronger currency can influence trade flows significantly, often leading to trade deficits if imports rise sharply while exports decline.