For example, 1 Kuwaiti dinar = 3.26 USD = 266 INR, but the USD is strongest of them all
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It depends on international acceptance, really.
In the USD’s case, there was literally a whole conference that happened in the 1950s on how every international currency and transaction should be linked to the US dollar (instead of gold, which was the standard at the time). It was called the Bretton Woods conference.
That conference established the uniformity/strength of the USD as an *international* currency – not just a local one. And coming right off the back of World War 2, it seemed like a fabulous idea from the world’s strongest economy at the time. And it was also seen as required, because the British Empire was dismantling at a rapid pace, and the pound sterling (which was one of the strongest pre-war currencies) was staring at financial ruin.
And old traditions die hard. Not everyone accepts the Kuwaiti dinar as a recognised international currency for transactions.
A fun fact: the most universally accepted currency is still gold. Although of course, you don’t have gold coins used for transactions any more, it’s been said that push comes to shove, the world will go back to gold as a standard. It’s the one currency that remains strong even in the face of enormous economic upheaval.
The exchange rate is just the cumulated history of that currency, as reevaluations happens by factors. Being “strong” means stable, not having a low rate.
Basically: can the amount X of currency get you the same goods today as tomorrow (=1 year, 10 year, 50 years, …).
Of course no one knows the future. Stability is a sign of trust into the capabilities of their economy to handle expected future challenges.
(No economy will be able to handle an upcoming alien invasion, but then it is also not very likely)
There is no strong/weak currency in the sense you are thinking of. There is just an exchange rate which happens to be at a particular ratio at a point in time. There are actually benefits to having a “low” exchange rate – i.e. a business selling to a nation with a “high” exchange rate gets paid “more” once they convert to domestic currency. So sometimes (exporting) nations actually want a “low” exchange rate.
In terms of having a higher unit value, the basic unit of currency is, in itself, meaningless.
Yes, a dollar is worth less than a dinar… but it’s arbitrary what the size of that basic unit is… I could compare a dinar to $10 and we could say the “$10” is worth more. It’s even marked that way for Japanese yen… when reporting the exchange rates, it’s dollars vs. 100 yen.
As others have written, what we’re really interested in are whether it’s an effective store of value (consistent value) and whether we can use it readily.
You can readily exchange a U.S. dollar for whatever currency you want, and in many places use it directly to purchase goods and services. By contrast, if you have rupees and need Malaysian ringgit, you probably have to exchange rupees for dollars (or Euros, or pounds…) and the dollars for ringgit. Easily converted, easily used, that’s a useful currency.
The point in time exchange rate says very little about how much the currency is actually worth. It just shoes how just of one currency must be exchange to buy the same amount of goods with another currency. Think of it like miles and kilometers. Sure the mile has a larger value, but that doesn’t make it better in any sense, it just makes it a larger unit of measure.
What does make a currency strong is when it has a stable or rising value due to other currencies. In the case of the Kuwaiti Dinar, it was at a high 2008 at 3.80 USD, but has since gone down to 3.26 USD, so it isn’t as strong as it used to be, at least relative to the USD.
However if you compare the Kuwaiti Dinar to the Euro or the British pount, it has gone up since 2008.
The USD has gone up or remained stable relative to almost every other major currency during that time, so it is considered a strong currency.
Exchange rates are effected by the supply and demand on the foreign exchange markets. If you want to buy something in the US you need to pay in dollars. If you want to buy something in the EU you need Euro. If the US supplies less dollars in the foreign exchange market it appreciates and vice versa.
Having a weak currency is not a bad thing though as some countries do not have an absolute advantage in trade – having a greater production output. If your currency is weak it is cheaper for other countries to import your goods.
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