What factors determine the strength of a country's currency?

Question

If you think the economy strength of a country determines its currency strength, then please also justify why British pounds are stronger than US dollars eventhough USA has got a better economy? Furthermore, Hong kong dollars are lower than many other countries like Malaysia eventhough its economy is much stronger than of Malaysia.

Hence what exactly determines the strength of a country's currency?

Answer 1

"Strength" of a currency is based on several factors, the biggest being nominal interest rates, inflation, current account balance, the outlook for future deficits, labor supply, trade balance and productivity.

Let's take the US and China for example. The Yuan is at RMB7.9/US dollar. The relative balance doesn't mean anything by itself. That is, China is not 8x weaker than the United States - it's just a nominal number. Real strength is determined when you translate those currencies into the purchasing of goods and services. This is called the "Purchase Price Parity" theorum. A classic example, is the "Big Mac Index" done by the Economist. A Big Mac may cost RMB12 in Beijing but US$3.50 in New York City. While 12 is more than 3.50, the dollar equivalent is only US$1.50. This is an illustration of how the Chinese Reminimbi is much "weaker" than the UU dollar.

But how does a currency get there?

Many, many factors - but let's start with one - labor. First, there are 1.3b Chinese - many who are desperately poor. This means a huge amount of labor that is willing to work for low salaries to do unskilled things like manufacturing. At its core, this is why it costs so little to make shoes in China.

Let's look at another factor: current account balance. The US is running a large current account balance (i.e. budgt deficit). That deficit is NOT like you and me where we need to pay a bank back. The US government IS the bank, so they pay for their shortfall by issuing debt in the Treasury market (e.g. T-bills, T-bonds). The more money you make, the more investors want to be compensated. For example, Zimbabwe is printing HUGE amounts of money to make up for its own financial incompetence - printing around 200x as much money compared to the previous year. This is making the currency increasingly worthless and creating INFLATION.

A third factor is productivity. Sure a Big Mac only costs US1.50 in China, but Americans are much more productive than Chinese labor. So it might take, hypothetically speaking, 3 accountants to do what one American accountant can do.

Answer 2

Gold has nothing to do with it Every second all the official currencies adjust to each other on the International free market The USA $ is one of 182 currencies. You can compare every currency to any other currency at any given moment. The country with the safest political system, the most productive companies and the least amount of war mongers and military gets the strongest currency value. Which is at that point Switzerland. One of the weaker ones is the USA

Answer 3

How people view the status of currency in the world. I would actually disagree and venture to say that the US dollar is stronger than British pounds. Look how foreigners come to America to work for the American dollar. I don't hear much about immigrants looking to Britain for their high wages.

Answer 4

the most important thing is how much it costs to buy other currencies with it