How do central banks influence exchange rates and international payments?

An influence that affects every business

Imagine a French SME exporting cheeses to Japan. One morning, she discovers that the yen has fallen against the euro, making her products 10% more expensive for her Japanese customers. Conversely, an ETI importing American machinery sees its costs rise 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 American Federal Reserve (Fed). These organizations influence exchange rates — that is, the value of one currency in relation to another — and, by extension, the international payments of businesses.

But how does that work exactly? This article explains, step by step, the mechanisms involved, their impacts on trade and payments, and how you can take advantage of them, whether you are an SME or an ETI.

Central bank tools: the keys to the currency market

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 rates: A fundamental lever

The key 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:

• Rising the key interest rate: When a central bank increases 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 the higher returns. As a result, the currency is getting stronger. For example, the dollar appreciated against the euro in 2022, from 1.13 to 0.96 in a few months.

• Lower key interest rate: Conversely, a decrease, 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 attractiveness of the currency for investors. This can weaken the currency. The euro thus lost value against the dollar after this cut, oscillating around 1.05 dollars.

These movements directly affect businesses. A weaker euro makes French exports more competitive, but increases the cost of imports.

Direct interventions on 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, such as during the devaluation of the Argentine peso in 2002, where the central bank tried (unsuccessfully) to limit the fall.

Foreign exchange reserves: a strategic weapon

Finally, foreign exchange reserves — foreign currency stocks — allow central banks to manage crises. For example, in 2024, the Bank of Japan had to intervene in 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 impacts on international trade.

These reserves, estimated at 14 trillion dollars worldwide in 2024, offer stability to currencies, but their use depends on the strategic priorities of each central bank.

How a key rate strengthens or weakens a currency: a detailed explanation

Why adjust rates: economic goals

Central banks adjust rates to meet specific economic goals. Here are the main reasons:

• Rising rates to fight inflation : When inflation gets too high, a central bank increases rates to reduce demand in the economy. For example, in March 2022, the Fed raised its key interest rate against.

inflation of 9.1%, making it more expensive to borrow and curbing excessive consumption, which strengthened the dollar by attracting foreign capital.

• Rising rates for other reasons:

-Stabilize financial markets: A rise can calm the markets in case of excessive speculation, as in 1994, when the Fed raised rates to avoid a financial bubble.

-Strengthen monetary credibility: A central bank can raise rates to signal its determination to maintain stability, like the ECB in 2000 to establish the legitimacy of the nascent euro.

• Lower rates to boost consumption and growth : When the economy slows, lower rates stimulate borrowing and spending. In June 2024, the ECB started rate cuts (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 after? :

• Background of the financial crisis : In 2008, the subprime crisis plunged the world into a major recession. The Fed reduced its rates to 0-0.25% as early as December 2008, and the ECB followed in 2009 (rate to 1%, then close to 0% in 2014), to avoid an economic collapse.

• Reviving the economy : Zero rates encourage borrowing, stimulating consumption and investment. In the United States, this allowed for a gradual recovery (growth of 2.5% in 2010).

• Avoid deflation : Negative inflation (deflation) paralyzes the economy by encouraging people to postpone purchases. Zero rates were aimed at maintaining positive inflation, a major challenge until 2015 (inflation close to 0% in Europe).

• Supporting the markets : Low rates also stabilized the financial markets, avoiding a widespread panic after the fall of Lehman Brothers.

‍

Effects on currencies: a supply and demand game

To fully understand the impact of a key rate on a currency, you need to look at the underlying economic mechanism. Here is a clear, step-by-step explanation:

• Effect on capital flows : Investors are always looking for the best return. If the Fed increases its rate to 5%, while the ECB maintains it at 3%, investors will buy dollars to invest in American assets (e.g. bonds), which increases the demand for dollars and strengthens the currency.

• Impact on currency demand : A rise in rates reduces the quantity of money in circulation (restrictive policy), increasing its scarcity and therefore its value. Conversely, lower rates inject more money, reducing its relative value.

• Market perception : Rates indicate economic health. Rising rates are often seen as a sign of confidence, strengthening the currency. For example, in 2018, the Fed's rate hike signalled a robust American 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 monitored by international companies.

Impact on international trade: winners and losers

Exchange rate fluctuations, dictated by central banks, are redrawing the rules of international trade. Here's how:

Exports and imports: a balance game

A strong currency, like the dollar in 2022 after Fed rate hikes, makes American exports more expensive abroad, but reduces the cost of imports. Conversely, a weak currency, such as the euro after the ECB's rate cuts in 2024, stimulates European exports. A French SME exporting wines saw its sales in the United States increase by 15% between 2014 and 2015 thanks to a lower euro, according to INSEE data.

Costs and competitiveness

Currency changes also affect competitiveness. An ETI importing Asian components can see its costs increase by 10% if the euro weakens against the yen. Conversely, a strong currency can reduce exporters' margins, as during the appreciation of the Swiss franc 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 U.S. imports, but exports are down.

Impact on international payments: risks to be controlled

International payments, which represent millions of daily transactions for SMEs and ETIs, are directly affected by these dynamics.

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, increased import costs by 15% for British businesses. For a French SME buying American raw materials, a fall in the euro from 1.10 to 1.05 dollars increases a 100,000 euro bill by 4,800 euros in one week, a shock that can unbalance its cash flow.

Hidden costs and unpredictability

International payments involve currency conversions, which are often subject to fees. These costs, estimated at 2-3% per transaction by the French Banking Federation, add to the volatility of rates, making payments unpredictable. A French agri-food ETI, for example, could lose 10,000 euros on a payment of 200,000 dollars if the exchange rate changes suddenly.

• Risks to watch out for:

-Sudden changes in exchange rates.

-Unexpected conversion fees.

-Loss of visibility on future costs.

Lessons from the past and the current context: a lasting influence

What history teaches us

Monetary policies have always had a major impact. In 1985, the Plaza Accords saw major central banks, including the Fed, devalue the dollar against the yen, increasing Japanese exports by 20% in two years. Conversely, the 2008 crisis showed the limits of these policies: massive rate cuts by the ECB did not prevent a 15% drop in European trade. These lessons are a reminder that monetary decisions are not a silver bullet.

The context of 2025: One example among others

In 2025, these mechanisms remain in place. The Fed, after raising its rates in 2022, initiated cuts in September 2024 (from 5.33% to 4.25-4.50% at the end of 2024), before maintain in January 2025 in the face of persistent inflation (2.9% in December 2024). The ECB, after hikes until 2023, cut rates in June 2024 (from 4.5% to 2.75% in February 2025), illustrating an attempt to relaunch the economy. These decisions, reported by Bloomberg, show how central banks continue to influence currencies and international payments.

Conclusion: adapt to thrive

Central banks, through their key rates, interventions and foreign exchange reserves, play a central role in the value of currencies, international trade, and payments. Whether through the historic rate hikes in the 1980s or the recent adjustments in 2025, their decisions create opportunities and challenges for SMEs and ETIs. 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.

An offer to support you: Keewe's FX expertise

To manage these uncertainties, discover Keewe's FX offering:

1. We offer a transparency total on your transactions with rates competitive.

2. We provide access to a wide range of currencies for your international payments.

3. Our tools like Futures contracts protect your margins against volatility.

4. Our advisers support you with a human and personalized approach.

Take control of your payments today with Keewe !