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
How strong a currency is, mainly depends on the strength of the economy behind it.
Let’s take the US Dollar as an example, since you mention it. It’s strong mainly because the US economy is really strong (oversimplistic way of looking at it but it’s ELI5).
Its strength will be measured against the strength of another currency. For example, the USD could be strong against the GBP, yet weak against the JPY at the same time.
Generally:
* A strong currency is more stable and doesn’t fluctuate as much.
* A weak currency is linked with high rate of inflation, budget deficits, and slow economic growth.
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