Because of Brexit, the pound – i.e., British currency – has just plunged to a thirty-year low against the dollar. The euro has also fallen to a low against the dollar. The Japanese yen’s value has also gone up in value in comparison to the pound. But what does that mean for you – if you haven’t invested in currency? And what does it mean for a currency to be strong or weak? It might affect you more than you think.
What Makes a Currency Strong or Weak?
A currency is classified as strong when it is worth more than another country’s currency – in other words, if the American dollar was worth half a pound, the pound would be considerably stronger than the dollar. That means that the American dollar would beconsiderably weaker than the pound.
It also means thatit would be easier for someone from England to afford a vacation in America than it would be for someone from America to afford a vacation in England. It also means that products from England would cost more for an American, and products from America would cost less in England.
Safe Havens
Some countries have very strong currencies when the world economy is weak or politically unstable. These countries are called “safe havens” because that country is viewed as economically and politically stable. In other words, their currency is likely to recover from any turmoil going on. The U.S. is viewed as a “safe haven,” so the dollar tends to get stronger in times of instability.
Benefits of a Strong Currency
It might seem like you would want your country’s currency to be the strongest. When your country’s currency is very strong, imported goods are cheaper and it’s easier for you to take a vacation in a foreign country.
You’ll have more disposable income and are more likely to be able to take that vacation you always dreamed of. Butit’s not quite that simple.
Benefitsof aWeak Currency
Some countries keep their currencies weak on purpose. Why would they do that, if they could get all of the benefits described above?
Well, if it’s cheaper for your country to import goods – because its currency is stronger than another country – that makes it more expensive for the other country to import goods.
In addition, people might buy imported goods instead of domestically produced goods in order to save money. When your currency is weaker, more people want to buy your country’s goods, which means that there will be more demand, which means that there will be more jobs.
The Bottom Line
A strong currency is good for people who like to travel abroad, and people who like imported products, because those will be cheaper. However, it can be bad for domestic companies.
When currency is weak, that can be really good for jobs, but it’s bad for people who want to travel abroad or use imported products. And with the world getting more and more global, more and more products are imported, so thataffects people’s disposable income. Ideally,it’s important to maintain a balance.
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FAQs
A currency is classified as strong when it is worth more than another country's currency – in other words, if the American dollar was worth half a pound, the pound would be considerably stronger than the dollar. That means that the American dollar would be considerably weaker than the pound.
What does it mean to have a strong currency? ›
The U.S. dollar is considered strong or weak in comparison to the values of other major currencies. A strong dollar means U.S. exports cost more in foreign markets. A weak dollar means imports are costlier for American consumers to buy. The value of the U.S. dollar fluctuates constantly in response to market demand.
How do you define currency strength? ›
A currency's strength is determined by the interaction of a variety of local and international factors such as the demand and supply in the foreign exchange markets; the interest rates of the central bank; the inflation and growth in the domestic economy; and the country's balance of trade.
What does it mean if we describe the U.S. dollar as strong? ›
The dollar is considered strong when it rises in value against other currencies in the foreign exchange market. A strengthening U.S. dollar means it can buy more foreign currency than before.
What does a strong pound mean? ›
A strong pound means higher exchange rates and a better deal for UK travellers.
What is another term for a strong currency? ›
In macroeconomics, hard currency, safe-haven currency, or strong currency is any globally traded currency that serves as a reliable and stable store of value.
What is the problem with a strong currency? ›
The appreciation in the currency leads to a reduction in inflationary pressure, but high growth is maintained. If you have a recession, a strong currency can make the recession deeper. In a recession, a strong currency will lead to a further fall in domestic demand.
Which is the strongest currency in the world? ›
1. Kuwaiti dinar. Known as the strongest currency in the world, the Kuwaiti dinar or KWD was introduced in 1960 and was initially equivalent to one pound sterling.
What is the weakest currency in the world? ›
What Is the Weakest Currency in the World? The weakest currency in the world is the Iranian rial (IRR). The USD to IRR operational rate of exchange is 371,992, meaning that one U.S. dollar equals 371,922 Iranian rials.
Is the dollar strong in 2024? ›
Despite uncertain macro conditions, the dollar has continued to demonstrate strength — largely thanks to sticky inflation, a resilient U.S. economy and year-to-date highs in yields. Indeed, in a display of U.S. exceptionalism, the greenback has gained against just about every other major currency in 2024.
Higher interest rates in a country can increase the value of that country's currency relative to nations offering lower interest rates. Political and economic stability and the demand for a country's goods and services are also prime factors in currency valuation.
Who benefits from a weak currency? ›
A weak currency may help a country's exports gain market share when its goods are less expensive compared to goods priced in stronger currencies. The increase in sales may boost economic growth and jobs while increasing profits for companies that are conducting business in foreign markets.
Is a weak pound good or bad? ›
So, if you have invested in a company that exports internationally, or is planning to, your business may become more valuable thanks to the drop in the pound. On the flipside, a weak pound can be damaging for companies that import goods from abroad and for those with supply chains around the world.
Which country has the strongest currency? ›
Kuwaiti Dinar (KWD)
The Kuwaiti dinar is the strongest currency in the world, with 1 dinar buying 3.26 dollars (or, put another way, $1 equals 0.31 Kuwaiti dinar). Kuwait is located on the Persian Gulf between Saudi Arabia and Iraq, and the country earns much of its wealth as a leading global exporter of oil.
Is it always good to have a strong currency? ›
Strong currencies reduce the cost of imported commodities and imported manufactured goods, both of which help to reduce consumer costs, and result in a more robust and growing economy. Among those imported commodities are crude oil, or refined petroleum products like gasoline.
What does it mean when a currency is weak? ›
What Is a Weak Currency? A weak currency refers to a nation's money that has seen its value decrease in comparison to other currencies.
What does it look like if the U.S. dollar is weak? ›
Essentially, a weak dollar means that a U.S. dollar can be exchanged for smaller amounts of foreign currency. The effect of this is that goods priced in U.S. dollars, as well as goods produced in non-US countries, become more expensive to U.S. consumers.
