Recently I noticed that the 1 USD was worth 0.8 GBP and now it’s worth 0.78 GBP. Not much deal to an average consumer. What does that mean for the economy for both countries and what does it tell about the relative strength of both currencies?
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As far as “what it means for the economy of both countries,” the exchange rate plays a big role in determining the level of trade between countries. A “strong” currency sounds good, and in some situations it is – for example, if you’re traveling in a country with a “weaker” currency, your money will probably go farther. But at a national level, having a strong currency makes it harder to export goods, because it is more expensive for other countries to buy them.
Using the China example, when China imports goods from the US, they have to pay in dollars. Meaning that they have to buy dollars, which at the current exchange rate is a bit costly. On the flip side, if the US wants to import from China, it can buy 7 yuan with each dollar and use those to pay for goods.
The exchange rate is hardly the only thing that determines trade flows; it’s not even the biggest thing. At the end of the day, the US buys from China because China can make stuff very very cheaply compared to most other countries. But sometimes when two countries are offering similar products at similar prices, the exchange rate might determine which is more attractive.
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