However, in a world dominated by capital flows, there can be significant deviations from the long-term path indicated by the Real Effective Exchange Rate (REER). REER itself, one should note, is a function of several dynamic factors and variables and hence, may not serve as very accurate anchor as the base period loses its relevance in the face of more recent developments.
Even in the case of US dollar, the deviation from the long term represented by the REER is known to have been of the order of 80 per cent. Such volatility affects the earnings and balance sheet of all firms that have contracted or even economic exposures.