Is your currency stronger than the US Dollar?

Currency strength expresses the value of the currency. For economists, it is often calculated as purchasing power, while for financial traders, it can be described as an indicator, reflecting many factors related to the currency. Yet, what does a strength of a currency mean to an average Joe? Currency strength vs USD affects the rate at which a country is able to export or import. Thus a weak currency must result in high inflation. That is not true! The value of a currency is something that depends on a variety of factors. These factors can range from the value of natural resources present in the country, the percentage of GDP dependent on exports and Interest rates to the confidence of traders in the country's markets. The value of the lowest denomination of a currency is also instrumental in deciding its rate. The fact that 1 Indian Rupee is equal to about 16 South Korean Won doesn't mean that the purchasing power of Indians is higher than Koreans. What this really means is that South Koreans have artificially devalued their currency to make their exports more competitive. While having a strong currency certainly feels better when visiting foreign countries, a better indication of your purchasing power abroad comes from GDP per Capita (Nominal), something we discussed in the previous post. As we can see from the above map, US Dollar is insanely strong and bullish when it comes to exchange rates. This is due to its privileged position as the chief reserve currency of the world and the fact that is backed by the largest economic and military power on the planet.

The few major currencies that are stronger than US Dollar are majorly located either in the Middle East or Western Europe. Let us look into each one of them- Middle East- Currencies like Omani Riyal, Bahraini Dinar and Kuwaiti Dinar are some of the strongest in the world. This is because these four countries are oil-producing nations, they have a commodity that is in extremely high demand, and their strong economic policies make them attractive to investors. The subsequent influx of money and investments from this further solidifies the strength of each currency. Moreover, since these countries don't have any export except crude oil, devaluing the currency makes no sense to them. Europe- European currencies like Euro, British Pound and Swiss Franc are also stronger than US Dollar. In the case of the Euro, it usually remains on par with the USD. The Euro's main role is to shield the European economy from exchange shocks and reduce dependence on UD Dollar. Being a major world currency and backed by major financial powers, The European Central Bank has great control over its currency. British Pound and Swiss Francs have been traditionally bullish against the US Dollar due to their reputation as some of the most stable currencies in the world. The Pound and Franc have also been major reserve currencies backed by huge financial powerhouses like Credit Suisse, UBS, Barclays, HSBC and Lloyd's.