A few years ago, several countries dropped out of the European Monetary System because of the pressure to keep their country's rate within 2.25 percent of the European Currency Unit. The final catagory for exchange-rate arrangements is called more flexble arrangements . This category includes the freely floating arrangements , which allow the exchange rate to be determined by the supply and demand for the currency. It may be said that exporters are helped by having weak domestic currencies, which should increase foreign demand for the products by making them less expensive. Importers are helped by having a strong domestic currency, which lowers the price of imports in relation to domestically produced goods.
Many firms engage in both importing and exporting.
This makes it difficult to determine whether a weak or strong currency is more favorable to business. As you can see, neither is necessarily the case. American exporters were hurt by the strengthening dollar in the early 1980s. Simultaniously, the high dollar permitted U.S. manufacturers to source cheaply, U.S. importers to sell more foreign products to American consumers, and U.S. tourists to enjoy less expensive foreign vacations. These trends reversed after the dollar peaked in 1985.