Imagine a French SME exporting cheese to Japan. One morning, it discovers that the yen has fallen against the euro, making its products 10% more expensive for its Japanese customers. Conversely, an SME importing American machinery sees its costs soar after a sudden rise in the dollar.
These fluctuations, which may seem unpredictable, are often the result of decisions taken by powerful institutions: central banks, such as the European Central Bank (ECB) or the US Federal Reserve (Fed). These bodies influence exchange rates - i.e. the value of one currency against another - and, by extension, companies' international payments.
But how exactly does it work? This article explains, step by step, the mechanisms involved, their impact on trade and payments, and how you can benefit from them, whether you're an SME or an ETI.
Central banks, such as the ECB or the Fed, have several tools at their disposal to influence exchange rates. Their main objective is often to maintain economic stability - by controlling inflation or supporting growth - but their actions have a direct impact on currencies and international trade.
Key interest rates: a fundamental lever
The policy rate is the interest rate at which commercial banks borrow from their central bank. It is a key tool for influencing the value of a currency.
Here's how it works:
- Raising the policy rate: When a central bank raises its rate, as the Fed did in March 2022 in the face of inflation reaching 9.1% (from 0-0.25% to 5.25-5.50% in July 2023), it makes borrowing more expensive. This attracts foreign investors, who buy the local currency to take advantage of higher yields. As a result, the currency strengthens. For example, the dollar appreciated against the euro in 2022, from 1.13 to 0.96 in just a few months.
- Lowering the key interest rate: Conversely, a cut like the one initiated by the ECB in June 2024 (from 4.5% to 4.25% for the refinancing rate) makes borrowing cheaper, stimulating the economy but reducing the currency's attractiveness to investors. This can weaken the currency. The euro thus lost value against the dollar after this cut, hovering around $1.05.
These movements have a direct impact on companies. A weaker euro makes French exports more competitive, but increases the cost of imports.
Direct intervention in foreign exchange markets
Central banks can also intervene directly by buying or selling currencies to adjust their value. For example, in 2011, the Swiss National Bank sold Swiss francs to limit their appreciation, which was hurting local exporters. These interventions are less frequent, but they can stabilize a currency in crisis, as during the devaluation of the Argentine peso in 2002, when the central bank tried (unsuccessfully) to limit the fall.
Foreign exchange reserves: A strategic weapon
Finally, foreign exchange reserves - stocks of foreign currency - enable central banks to manage crises. For example, in 2024, the Bank of Japan had to intervene on the foreign exchange markets to support the yen, which had reached critical levels against the dollar, spending tens of billions of dollars to stabilize its currency and limit the negative impact on international trade.
These reserves, estimated at $14,000 billion worldwide by 2024, provide currency stability, but their use depends on the strategic priorities of each central bank.
Why adjust rates: economic objectives
Central banks adjust rates to achieve specific economic objectives. Here are the main reasons:
- Raising rates to combat inflation : When inflation becomes too high, a central bank raises rates to reduce demand in the economy. For example, in March 2022, the Fed raised its key rate against
inflation of 9.1%, making borrowing more expensive and curbing excessive consumption, which strengthened the dollar by attracting foreign capital.
- Rising rates for other reasons :
-Stabilize financial markets: An increase can calm markets in the event of excessive speculation, as in 1994, when the Fed raised rates to prevent a financial bubble.
-Reinforcing monetary credibility: A central bank can raise rates to signal its determination to maintain stability, as the ECB did in 2000 to establish the legitimacy of the nascent euro.
- Lower rates to boost consumption and growth: When the economy slows down, lower rates stimulate borrowing and spending. In June 2024, the ECB began cutting rates (from 4.5% to 2.75% in February 2025) to encourage businesses and households to invest, weakening the euro slightly but supporting European growth.
Why were rates at zero in 2008 and beyond? :
- Background to the financial crisis: In 2008, the subprime crisis plunged the world into a major recession. The Fed cut rates to 0-0.25% in December 2008, and the ECB followed suit in 2009 (rates at 1%, then close to 0% in 2014), to avert an economic collapse.
- Boosting the economy: Zero interest rates encourage borrowing, stimulating consumption and investment. In the United States, this has led to a gradual recovery (2.5% growth in 2010).
- Avoiding deflation : Negative inflation (deflation) paralyzes the economy by encouraging people to postpone purchases. Zero interest rates aimed to maintain positive inflation, a major challenge until 2015 (inflation close to 0% in Europe).
- Supporting markets : Low interest rates also stabilized financial markets, preventing widespread panic after the collapse of Lehman Brothers.
Effects on currencies: a game of supply and demand
To fully understand the impact of a key rate on a currency, we need to examine the underlying economic mechanism. Here's a clear, step-by-step explanation:
- Effect on capital flows: Investors are always looking for the best yield. If the Fed raises its rate to 5%, while the ECB keeps it at 3%, investors will buy dollars to invest in US assets (e.g. bonds), driving up demand for dollars and strengthening the currency.
- Impact on currency demand: A rise in interest rates reduces the quantity of currency in circulation (restrictive policy), increasing its scarcity and therefore its price.
value. Conversely, a fall in rates injects more money, reducing its relative value.
- Market perception: Rates signal economic health. A rate rise is often perceived as a sign of confidence, strengthening the currency. For example, in 2018, the Fed's rate hike signaled a robust US economy, attracting global capital.
- Long-term effects: These changes are not instantaneous. A currency can remain strong or weak for months or even years, like the euro between 2014 and 2015, which fell from $1.39 to $1.05 after US rate hikes.
These dynamics show why central bank decisions are so closely watched by international companies.
Exchange rate fluctuations, dictated by central banks, are reshaping the rules of international trade. Here's how:
Exports and imports: a balancing act
A strong currency, like the dollar in 2022 after Fed rate hikes, makes US exports more expensive abroad, but reduces the cost of imports. Conversely, a weak currency, such as the euro after ECB rate cuts in 2024, boosts European exports. A French SME exporting wine saw its sales in the US increase by 15% between 2014 and 2015 thanks to a weaker euro, according to data from INSEE.
Costs and competitiveness
Currency fluctuations also affect competitiveness. A small business importing components from Asia can see its costs rise by 10% if the euro weakens against the yen. Conversely, a strong currency can reduce exporters' margins, as in the case of the Swiss franc's appreciation in 2011, which prompted Swiss companies to lower their prices to remain competitive.
- Examples of impact:
A weak euro (e.g. 2015): French exports +10% to the United States.
A strong dollar (e.g. 2022): cheaper US imports, but lower exports.
International payments, which account for millions of daily transactions for SMEs and ETIs, are directly affected by these dynamics.
Interest rate volatility: A risk for cash flow
A sudden fall in the euro, as in 1992 after the abandonment of the European Exchange Rate Mechanism, has pushed up import costs by 15% for British companies. For a French SME buying American raw materials, a drop in the euro from 1.10 to 1.05 dollars increases a 100,000 euro invoice by 4,800 euros in one week, a shock that can unbalance its cash flow.
Hidden costs and unpredictability
International payments involve currency conversions, often accompanied by charges. These costs, estimated at 2-3% per transaction by the French Banking Federation, are added to the volatility of rates, making payments unpredictable. A French agribusiness, for example, could lose 10,000 euros on a payment of 200,000 dollars if the exchange rate suddenly changes.
- Risks to watch out for :
-Sudden changes in exchange rates.
-Unforeseen conversion costs.
-Loss of visibility on future costs.
What history teaches us
Monetary policies have always had a major impact. In 1985, the Plaza Accords saw the major central banks, including the Fed, devalue the dollar against the yen, boosting Japanese exports by 20% in two years. Conversely, the 2008 crisis showed the limits of these policies: massive rate cuts by the ECB failed to prevent a 15% fall in European trade. These lessons remind us that monetary decisions are not a miracle solution.
The context of 2025: One example among many
In 2025, these mechanisms are still at work. After raising rates in 2022, the Fed initiated rate cuts in September 2024 (from 5.33% to 4.25-4.50% at the end of 2024), before lowering them again in December 2025.
rates to be maintained in January 2025 in the face of persistent inflation (2.9% in December 2024). The ECB, after hikes until 2023, cut rates as early as June 2024 (from 4.5% to 2.75% in February 2025), illustrating an attempt to revive the economy. These decisions, reported by Bloomberg, show how central banks continue to influence currencies and international payments.
Central banks, through their key rates, interventions and foreign exchange reserves, play a central role in currency values, international trade and payments. Whether through historic rate hikes in the 1980s or recent adjustments in 2025, their decisions create opportunities and challenges for SMEs. Understanding these dynamics - how a key rate attracts or repels capital, strengthens or weakens a currency - is essential to anticipate fluctuations and protect your margins.
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