how is one currency more powerful than another? If you exchange $100 to 102 francs don’t you still have $100 but in francs?
In: 53
You are correct.
However a burger might cost 25 francs in Switzerland but the same burger costs 5$ in the USA.
You can buy more burgers with USD than with Francs.
No, you have 102 francs. Assuming the exchange rate is symmetric (it often isn’t, because banks & money changers charge a transaction fee for the convenience of exchanging currency), you can turn those 102 francs back into $100. However, there’s no guarantee that relationship will hold in the future. The dollar might appreciate vs. the franc, in which case you might only be able to exchange those 102 francs for $90. Or it might depreciate, and you might be able to exchange them for $150. The former situation is colloquially termed “the currency becoming more powerful”, because you can exchange $100 for 113 francs and get more for your dollars.
Its basically just a “how many people currently want to buy a currency” vs “how many people want to sell it”
The Dollar is strong at the moment because the FED made it possible to get secure interest in dollar while you have to pay interest at the moment to HOLD euros. The EZB is always behind the FED in these changes so probably in some months the Euro will rise again due to being again interesting to be held because of the interest you can gain with it.
Quite simply, exchange rates change. When you exchange your $100US for $102FR, you no longer have any US currency. It’s all Francs. So in six months, when the exchange rate is no longer 1.02 FR/US, but instead it’s 1.10 FR/US, if you exchange those Francs back into US Dollars, you will have only ~$95US.
The momentary rate of exchange matters very little (like going on vacation). To people who exchange large amounts of currency, or who hold it for long periods of time, actual and expected trends in currency exchange rates very much matter.
A country’s economy determines prices for goods and services. Unless specific vendors will alter their price to receive funds in a preferred currency, goods and services cost you the same amount of monetary value, regardless of denomination held. In fact, relative economic performance between currency bearing nations is a big factor which helps set the rate of exchange between their currencies. Buying its currency is wise if you believe a nation has betters years ahead.
You’re an investor, you really want to stop investing in Germany and start investing in china. You need to sell your franks to someone that wants them and buy yuan from someone that doesn’t. If many people feel the same way, too many franks are for sale and too few yuan. So you get less buying power from selling franks that aren’t highly sought and even less from buying highly demanded yuan. if you normally traded 10 for 10, you might now have to trade 14 for 8.
in short, money is a commodity in demand like anything else.
EDIT: Swiss vs Germans, frank vs franc. embarrassing, but I’m not changing it.
let’s assume the man was selling his German hotdogs as Donaldtrumptinyhands suggested.
Look up the “Big Mac Index”.
what you can buy with the same amount of money is different.
$5 US may buy you one big mac in the US. but it might buy you 1.7 Big Macs in Peru.
If you ignore transaction fees then yes. Until the rates change, at that point you may have more or you may have less. Rates change constantly.
The absolute values don’t matter other than as a psychological barrier. What matters are the changes in relative value.
If I want to buy something that is made in the USA then the manufacturer will be paying his staff in dollars which means his costs are in dollars. This means he’ll want to sell at a fixed price in dollars. If I want to pay in Euros and the euro has gone down relative to the dollar then to me the price will be higher. This a) costs me more and b) encourages me to buy a version of the product built locally which will still be the same price as before.
Things get more complicated when you allow for the fact that the manufacturer will need to buy parts, some of them will come from overseas and so their prices will also depend on exchange rates.
Imagine you bought $100 of bananas. Sure… at that point, you own $100 worth of bananas.
Now imagine that just after you do that, the banana countries announce that they are going to war, that banana tax is going up, or that there’s been a bad drought in the country.
Now you still have bananas but they could be worth a lot more or a lot less almost instantly. Converting them back at that point won’t get you $100 but another number.
The value of a currency is tied to the actions of the banks and countries using it. Zimbabwe’s currency became worthless almost overnight. A country’s inflation can literally explode like that. Countries can “print” more money… so if you have $100 and the US decided to print several trillion dollars tomorrow, do you believe that everyone will just accept that the US is worth several trillion dollars more today than yesterday even if nothing else changed? No. All you’ve done is “divided” the value of the currency into smaller units because you have more “pieces” of it now. That $100 has the buying power of, say, $10 now. You can’t just print money and expect the world to honour it at its full value forever, no matter how many times you print more. It’s not monopoly money.
The values of currency vary in themselves, against every other currency, and against every commodity that you could buy with them, all the time. Literally each second it changes. Your money is in Russian currency? Russia goes to war. Russia’s customers refuse to pay in Russian currency because they think it’s worthless to them now as only Russia can dictate how you spend it in large volumes. Now all your investments in Russian currencies are worthless. It literally just happened like that.
Value is relative, not absolute. For the average person, a currency’s value depends entirely on what you can spend it on. If you live in the US and want to buy a Whopper at your local Burger King location, you have to spend USD for that whopper. It doesn’t matter if you walk in there with the equivalent amount of Chinese Yuan or you have ten times as much Yuan as the current exchange to USD. If you bills don’t have buying power when and where you need to pay for something, they might as well be worthless.
What makes a currency worth more relative to another depends on how much of it is out there and what it can be spent on. If a country prints too much currency into circulation, no one will want it, and it loses value. If a country produces goods that you can’t buy anywhere else in the world, that money becomes valuable, because people need it to spend on that good.
To illuminate this process a little more, let’s say that you have bought something on Amazon, which will ship from China to the US. Your USD gets processed by Amazon, and goes into Amazon’s American bank account. Then, Amazon will take out Yuan from a Chinese bank, and use it to pay the seller. For most international transactions, even though you might only have to pay in your home currency, the business that you give the money to will convert it to the currency of the target country somewhere down the line.
The thing about money is that it’s constantly being spent or invested, and regularly gets printed or loaned, meaning that the amount available is in constant flux. At the same time, as new businesses grow and old ones die, supply and demand, what you can buy with any given currency, is also in constant flux. Exchange rates go up and down constantly because they’re based on two core principles that are both changing by the hour.
You are correct, for a given point in time.
Exchange rates don’t really matter. What matter is change in the rates over time. If your 102 francs suddenly is only worth $90, then francs have gotten weaker relative to the dollar.
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