I have always wonder why its so much stronger ? when you go to Japan, everything is cheaper in a sense and the U.S dollar means more in Japan. Why is that ?
In: Economics
The U.S. dollar is strong because it’s the world’s primary reserve currency, used in global trade and held by central banks around the world. The large, stable U.S. economy, political stability, and trust in its financial system also boost demand for the dollar, making it stronger compared to many other currencies.
Originally, The United States was the largest economy that didn’t get bombed out by The War. Everyone who wanted to buy manufactured goods had one shop to go to, and that shop liked to trade in dollars.
Now, it’s mostly a matter of Convenience. The dollar holds on for the same reason most places use 24 Hour Time… commerce is just easier on a shared standard.
Imagine there’s a country called Apple and one called Banana and you worked in a currency exchange in Banana
Apple is a country perpetually on the brink of collapse, doesn’t pay their bills, has a weak economy, doesn’t sell a lot of things to other countries, etc
Banana (your country) is a generally healthy country that doesn’t have those issues. Banana also sells a lot of things to other countries and if you buy those things, you need to use Banana dollars
A foreign tourist shows up with 100 Apple dollars and wants to get as much Banana dollars as they want
Apple dollars aren’t very in demand. It’s not like too many people want them. What can you even buy with them? Maybe it’s only worth 50-60 Banana dollars
Now flip the roles – a currency exchange in the country of Apple has a guy show up with a bunch of Banana dollars. Those are in demand. If you have those, you can buy a lot of stuff from the country of Banana. Banana dollars are going to be pretty strong in that exchange
Foreign currency valuations are super weird and there are always exceptions, but that’s the general concept. Most of the globe *wants* US dollars to buy things you need US dollars to purchase so they’re generally pretty strong
edit: or even simpler, imagine you have a loser neighbor kevin and a successful friend james
if james writes you an IOU, that clearly carries more “value” than one from kevin. james has his stuff together and you *want* him around
those IOUs are dollars
The US is the biggest economy in the world, one of the most stable. And as a result, the US dollar is sort of the world’s default currency. All that gives it stability.
The strength of a currency is a slightly different concept than what you are getting at. You are talking about purchasing power parity. PPP a consequence of many factors – tariffs, cost of living, trade, GDP and much much more.
A currency’s strength is measured as relative change in conversion rates over time. Today, 1 dollar is 157 Japanese Yen. If that ratio trends down over a long period of time you would say that the Yen is stronger than the dollar even though one dollar would still buy many more Yen. The only thing that matters here is the direction.
While there is a relationship between PPP and currency strength, it’s not fixed. It’s theoretically possible that in the future that the next time you visit Japan, one dollar will buy more yen while at the same time the trip can feel much more expensive in dollars. In that case the Yen will have weakened against the dollar while PPP increases.
Much of it is trust. Currency that is stable over decades earns the trust of people. You have $1000 USD and you figure in a decade could still use it and buy decent amount of things with it. Compare that to Turkey or Argentina over the past decade and why people may be wary of trusting those currencies.
Being a stable currency is different than relative value of currencies. You can have a very stable currency that no one wants and therefore has no value in other countries. What you’re describing is called PPP – purchasing power parity.
Relative value of currencies has more to do with how much the international market wants and buys a nation’s goods, investment prospects, as well as how much people would pay to go live in said country.
There are a host of other variables that impacts it, but yeah, as far as I know it basically boils down to how much money do people of other nations want to spend into that country.
Countries like to hold other country’s currency as reserves. When people say the USD is the world’s reserve currency, they don’t mean that it’s the only currency other nations hold in reserve, they mean it’s the most popular one.
*USD = 58.4%
*Euro = 20%
There are other currencies held by nations in reserve as well, such as Renminbo, Pound Sterling, Yen, Swiss Francs, Canadian Dollar, and Austrlian Dollar (these all add up to about 18%)
And the remaining >4% is every other currency.
Think of it in two ways. First, let’s say you personally wanted to hold some foreign currency as an investment/savings in case something goes wrong with your countries, or in case you travel abroad. You’d probably pick from USD, Yen, Euro, and not something like the Niagerian Niara.
2nd, think of it like a language. If an Italian and Japanese person meet in an airport, what’re the odds they both know each other’s language? How about an Indian and a Russian? Chinese and Mexican? How many possible combinations of Language A to Language B translations exist? Instead, the most likely possibility is all of these people may know English as a 2nd language and speak in that.
Take a country like India: they’re trading abroad say, with Mexico, Saudi Arabia, South America, Japan, Egypt, etc. Which currency should they used for these transactions? Should India hold Mexican Pesos in reserve to buy Mexican goods? And then what do they do with the left over Pesos? Then they sell some goods to Egypt and receive Egyptian Pounds in exchange? Now what?
If each country traded in their own currency, it would make things a lot more complicated given all of the possible combinations of currency conversions out there. It’s much easier to just default to the USD (same as speaking English abroad) as the USD is plentiful outside of US borders, has very little restrictions placed on it, and is backed by the US government. Most other countries would likely be happy receiving it, and now trade is much easier.
It also helps that it’s the currency of the richest nation on earth and simplifies trading there as well
It’s the 7th ish most valuable currency. The real question is how tf the Kuwaiti dinar or Jordanian dinar is worth more than the USD. Turns out it’s all mostly arbitrary.
[This video](https://youtu.be/2TyTUXvoHQI?si=7jRdKsXruYPdpv27) goes into how the US gained its financial status and power since WWII
I’ll have to rewatch it at some point but from what I remember the gist is that the US, not really being affected by the war like European countries and Japan, had the ability to manufacture more and sell it to European countries. This gave them a massive economic advantage after the war and they basically made everyone else sign into a deal that put them on top
While they don’t have such a direct control of other economies now, they’re still the big boss and going against them will quickly backfire in one way or another
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