Currency strength serves as a key indicator of a nation’s economic health, political stability and financial policies. While numerous factors influence currency values, consistent economic performance and institutional stability often determine a currency’s global standing.
Understanding these dynamics is essential for investors navigating the foreign exchange market (forex) and analyzing international financial trends. Here’s a look at the strongest currencies in the world.
Various factors impact a currency’s strength. Many of these factors are interrelated, but they all largely point to two key areas — stability and economic strength. Here are four key areas that impact currency strength.
Interest rates are closely connected to exchange and inflation rates. Central banks establish interest rates for various reasons. According to Pete Mulmat, CEO of tastyfx, “Interest rates directly influence currency demand. Higher interest rates typically lead to a stronger currency as foreign investment increases along with inflows seeking higher yields.”
As the hunger for a specific currency increases, so does its value. This is similar to other investments, such as stocks. When more people purchase a stock, the value of the stock increases.
Inflation isn’t always met with consumer approval. In small doses, inflation can be good for currency, as it’s a sign of a robust economy. However, hyperinflation can have the opposite effect.
Inflation directly impacts the price of exports. If prices rise too much, demand for goods from foreign countries will decrease. Worse yet, it can cause citizens to purchase foreign products at a lower price, which can reduce the purchasing power of a nation’s currency.
Stability is closely tied to strength. Investors typically want to invest in something stable. Political unrest can lead to tumultuous economies and drive away currency traders.
Recent events demonstrate this relationship — for instance, the British pound’s volatility following Brexit in 2016 highlighted how political decisions impact currency values.
“The perception of future economic conditions, such as potential interest rate moves or political instability, can lead traders to position themselves accordingly,” Mulmat says. “This can sometimes happen even ahead of actual economic events.” In short, uncertainty isn’t good.
Trade balance, an increasing gross domestic product (GDP), and export diversity all contribute to currency strength. For example, if a country in the Middle East is oil-rich and funds its economy via oil exports, demand for the currency will likely follow.
