A question on exchange rates relation to economy?

Question

If a countries exchange rate is lower than usual compared to the US dollar does this mean that that countries economy is becoming stronger?

Answer 1

In general yes it does. A lower exchange rate means that there are less of the other currency needed to "buy" a dollar. This happens because more people want the currency to do things with it, and so the "price" of the currency goes up.

Coming at it from the other side: as more people want the other currency (and they are "paying" dollars to get it), they get less and less for each dollar. Thus the currency is actually getting more expensive.

In either case, the demand for the other currency is going up, due to increased demand for its uses (usually investment in the economy, or spending by citizens who may have had savings in a "safer" dollar). Both of those things are very good for an economy, so the end result is that a good economy pushes the exchange rate exactly as you say.

[Edit: To toddd below. He didn't ask if the exchange rate measures the economy's performance/strength, just if it can be an indicator...]

Answer 2

The economy's strength is measured by GNP not by exchange rate!