What governs the strength of a countries currencey?

Question

For instance, I want to understand why the UK pound is so strong against the US dollar when the USA have a stronger economy (if this is still the case). Obviously the situation is extremely complex but if I could atleasy get an idea. Cheers

Answer 1

It's like stock. It is worth what people are willing to pay for it.

Answer 2

It is a complex issue, and relative strength or performance of two countries' economies has little or nothing to do with it, except in extreme cases where one country's economy is collapsing and everyone is dumping the currency.

Dollar exchange rates always come down to supply and demand fundamentally: if the preponderance of activity is that people are selling dollars more so than buying dollars, that'll tend to make the dollar go down. If there is less such pressure on the UK pound, relatively speaking, than expect the USD to fall versus the Pound Sterling.

Now, when an American company imports something to the US, they exchange dollars for a foreign good; ie, they "sell" dollars. That's the "supply" -- dollars created in the US are spun out into the outside world. Meanwhile other people buy dollars, such as anytime a foreigner buys a US export or invests in US assets. That's the "demand" for US dollars.

My guess is that normally the main upward vector on the price of the dollar is foreigners wanting to buy US stocks, treasury bonds, and direct investment. Meanwhile the main downward vector is Americans importing goods. I suspect those are the primary variables that guide fluctuations one way or the other.

I suspect it's the large US trade deficit (actually, the current account deficit as a whole) now, which implies that on net there is probably more selling of dollars than buying of dollars going on: Supply exceeds demand, hence, dollar goes down. That's not a bad thing fundamentally (a lot of people misunderstand this), it just is what it is -- a mathematical result of the fact that Americans are currently preferring to buy lots of imports. As the US economy is increasingly service-based it may need to import more manufactured goods from elsewhere.

If and when the dollar gets "too low", that changes the variables and serves as a moderating feedback (imports become too expensive, while US exports and assets become enticingly cheap).

Answer 3

currency rates are determined by the supply and demand of a nations currency. the US dollar has strong value because it has strong demand because so many international transactions are conducted in the US dollar.

This is because most exchange rates are "floating" - i.e determind by supply and demand.

How many countries have a floating exchange rate? To my knowledge, New Zealand is about the only country that does.

Most countries say they do, but they use tricks in the book (central bank does) to ensure their exchange rates hold between certain levels. The Central bank (in the US, this is the FED) will buy/sell their currency to influence the price level. NZ does not do this (and it causes much heartache, because exporters/importers live and die on what the currency does.)

Odds are, this is what is happening with the Uk/Us exchange level.

Plus, the Pound is also a valuable currently internationally. the Pound is strong against most currencies.

Answer 4

I am not familiar with what is going on the UK, but from my understanding inflation is hurting our dollar a bit. Aggregate/overall demand for products is constantly increasing to a greater degree than aggregate supply which results in inflation.

Answer 5

Productivity, debt load, money supply (this is what hurts the US).

Answer 6

The ammount of gold archived and its creditability and potential longevity.