Take the US dollar for example. I was reading an article which said the dollar reached new highs recently, but there was a negative connotation to the piece. Doesn’t something “rising” generally mean it’s “stronger”? I usually think in terms of assets like stocks
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Supply and Demand my friend.
For example, let’s say there 1,000,000 American one dollar bills in the entire US economy (we’ll stick with just ones for ease of explanation). If you have a undeniable AMOUNT of something you can value it.
However, if you start to print more one dollar bills than what was originally in circulation, the worth of the dollar will reduce. This is called inflation, which America is dealing with HEAVILY right now.
Try to use a commodity like silver as a comparison, because the more there is of it the less it is worth and vice versa.
And since many of the worlds transactions use USD in some way or another, printing more and more money will make the dollar weak (meaning you will need to use more one dollar notes because they are worth less).
If a country that uses that currency is doing good (making lots of stuff people want to buy) people want it so they can buy stuff from that country. If a country that uses the currency is doing badly (doesn’t have stuff people want to buy) people don’t want that currency.
“Strong” or “weak” when talking about currencies is always in the context of some other currency. That being said, since the US dollar is the _de facto_ reserve currency for the world, the comparison is usually to the US dollar, or the US dollar to everything else (very generally speaking).
As to why a strong dollar can be considered an undesirable thing. If the dollar is strong relative to, say, the euro, that means if you convert dollars to euros, you get more euros than usual. That’s great if you’re American and you want to travel to the Eurozone or buy stuff from the Eurozone, but not so great if you want people to come to America or buy American stuff. Less money spent in or on American means less money going to American companies, and at least in theory to American workers.
Economic transactions involve at a minimum, two parties. To make it simple, lets call them buyer and seller.
For example, if someone works as an employee for the company, the person is selling their effort in exchange for money (salary) ie they are buying money and selling effort. The company is doing the reverse, they are selling the money and buying some effort.
When the currency appreciates, you have to consider both sides. If someone uses their money to buy goods from another country, this means the same amount of dollars (stronger) can purchase more goods. This benefits them. However if someone sells goods to another country, their goods (priced in stronger dollar) becomes more expensive and therefore fewer buyers might want to purchase them. This is bad for them.
The price of money (the exchange rate) is determined by the demand and supply of that currency relative to other currencies. A stronger currency benefits importers and hurts exporters. Rapidly changing currency rates, in itself, is not always good because it increases uncertainty in doing business and therefore less business is done because of this uncertainty.
One common way for currencies to appreciate is if banks increase the interest rate for deposits in that currency. In the US, that is typically driven by the Federal Reserve Bank. The downside to increasing interest rates is that it makes borrowers pay more for loans and it benefits savers. But go too far and reduced borrowing means reduced investment and therefore can contribute to lower employment (if a company doesn’t invest to grow, it will likely not hire more people).
Another reason currencies become weaker relative to another is social and political instability. For example would be Argentina today. Because there appears to be a lot of uncertainty, Argentinians don’t want to hold their currency, the peso, and prefer to exchange it for dollars instead. This makes the peso weaker relative to the dollar.
and bonds, where if they’re going up it’s a good thing
So why is a strong dollar seen as bad and a weak dollar seen as good?
Pretend you have two countries: Spacely and Cogswell. Spacely makes sprockets, Cogswell makes cogs. Each one prints their own currency. If you want to buy sprockets you need to buy them with Spacely space-bucks. If you want to buy cogs, you need to buy them with Cogswell coins.
So, as demand for sprockets goes up, there are more people looking to change their Cogswell coins into Spacely space-bucks. Just like with any other product, as the demand goes up, so will the price, assuming the supply is constant.
So, applying this to the real world, a strong currency is the currency of a country which makes and sells goods that people want to buy, and a weak currency is one which makes and sells goods which fewer people want. It’s that simple.
A strong currency has more buying power. The negative side of that is that the exports in that currency are more expensive.
A weak currency decreases the buying power of people using it. Think how Venezuelan’s can barely afford food (an extreme example). However, weakening a currency is a measure done to indirectly increase exports. Think for example food exports that can spoil. It’d be better to sell most (if not all) of the harvest before it spoils.
Also, some countries with weak currencies attract foreign tourists or expats that want to live off of a pension.
I just happen to watch something on the Singapore Reserves that explain a bit how this works. Watch from 8:10-10:14.
This is a topic that is way beyond ELI5. But the most basic jist of it is:
– It causes many disruptions and distortions to global trade.
– It disrupts government treasury markets.
– Causes inflationary pressure to other nations.
– Causes global dollar shortages, which because most trade and debts are settled in dollars, makes it hard to trade, or make payments on debts. This can lead to a global economic slowdown, or foreign companies or governments defaulting on debts.
– It forces other nations to raise their interest rates, which slows economic activity.
– It forces other nations to sell their US treasury reserves to get dollars, which then causes our interest rates to rise, and hurts our governments ability to raise capital, and makes our countries debt problem worse.
– If dollar demand is high, then all other assets lose value, including gold, stocks, real estate…etc.
The list goes on. But it should also be noted that it isn’t just the strength of the dollar, but also how rapidly it is gaining strength. Ideally, we want currencies to be and flow gradually. Rapid and large movements of the dollar, either up or down, cause problems.
I keep on hearing places like Japanese yen, Thai baht and whatnot are getting weaker, but on parity to my home currency (Australia), I think they are at least semi strong against Australia currency…. I would consider them weak if they have an like let’s say aud $1 = 100 yen or $1 = 30 baht or whatever it’s is
I could probs say the same for usd to aud parity as well, I recall a time where it’s would be on par, if not aud having a better currency than usd, but now usd is going downhill but still aud is shit despite hearing than australia is performing better than USA or those countries I mentioned.
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