Exchange rates — common mistakes

Not necessarily. While a strong currency (appreciation) lowers the price of imports, which helps control inflation and increases consumers' purchasing power for foreign goods, it makes a country's exports more expensive. This can harm export industries, leading to job losses and a worsening current account deficit. The desirability of a strong currency depends on a country's economic priorities – for example, controlling inflation versus promoting export-led growth.

The J-curve is a theoretical model that may not hold if its assumptions are not met. For instance, if trading partners retaliate with their own devaluations, any competitive advantage is neutralised. Furthermore, if demand for a country's key exports or imports is persistently inelastic even in the long run (e.g., for specialised machinery or essential commodities), the volume response will be weak, and the Marshall-Lerner condition may not be met. Global economic conditions, such as a recession in major export markets, can also prevent the expected rise in export volumes.

PPP is a long-run theory that is often overwhelmed by other factors in the short and medium term. Firstly, it ignores non-traded goods (like haircuts), transport costs, and trade barriers which prevent prices from fully equalising. Secondly, and most importantly in modern economies, massive international capital flows for investment and speculation have a much larger and more immediate impact on currency supply and demand than trade in goods. These financial flows respond to interest rate differentials and market sentiment, not relative price levels, causing significant volatility.