I’m reading about the changes in values of currencies at the moment, and I struggle to understand:
How are the values of currencies determined in relation to one another (e.g. EUR to GBP or GBP to USD), and why are some “stronger” than others?
I don’t understand why the GBP would be the strongest (or so it seems to me), followed by the EUR (although it’s recently been supplanted by the USD), and then the USD? With USA being the top economy in the world, and things like oil and gas traded in USD, why isn’t the USD the highest valued currency?
In: 3
It’s sort of like measuring an elephant’s mass in grams and a mouse’s mass in kilograms. Even though the elephant’s mass is higher, the unit kilogram is much larger than a gram. Currencies can be similar (a large economy may have a very small currency unit or a rather large one. The size of the currency unit has no relationship with the size of the economy. When the unit is smaller, there are many more of them than in a nation with a larger currency unit.
When businesses sell products in other nations they usually get the local currency, but if their factories are in their home nation, they can’t use this currency to pay their suppliers and employees. So they trade currencies in markets made specifically for trading one currency for another.
The same is true when investors own assets in other nations (or when individuals travel to other nations).
Based on the number of people who want to buy a currency and the number of people who want to sell it, the prices fluctuate (in some cases the government buys and sells far more currency to maintain a fixed price but most currencies are allowed to trade at any price and the prices can be rather volatile.
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