It’s common to hear talk of one currency being “stronger” or “weaker” than another. This comparison helps determine how much of each currency is required to make purchases. A currency that’s stronger than another means it requires less of that currency to purchase the same good or service. The opposite is true for weaker currencies.
The graph above compares two currencies with the US dollar (USD) over the past 3 years: the Swiss franc (CHF) and the Canadian dollar (CAD). As we can see, the USD/CHF exchange rate is almost always below 1, while the USD/CAD rate is always above 1 (always above 1.2, in fact). This means, in general, that a Swiss franc is stronger than a US dollar and a Canadian dollar is weaker than a US dollar.
Example: If a cup of coffee in the US costs 3 USD, it would require only 2.61 CHF but 4.02 CAD to purchase that cup of coffee.
Most USD currency exchange rates in FRED appear with the USD as the “base currency” (or numerator in the ratio) and the foreign currency is the “quote currency” (or denominator). This formula answers the following question: For each USD, how much of the foreign currency would it take to achieve the same value? However, there are a few exceptions where the USD is the quote currency—most notably, when comparing it with the British pound sterling (GBP) and the euro (EUR).
The second graph compares the USD with the GBP and EUR. Currently (i.e., at the end of August 2023), the USD is weaker than both those currencies, as the exchange rates are both greater than 1. So, it takes more than 1 USD to match the value of 1 GBP or 1 EUR.
As both graphs show, exchange rates fluctuate daily. There are many factors that can cause an exchange rate to change. One key reason is differences in a country’s inflation rate. Countries with higher inflation tend to have higher interest rates (to help curb inflation) compared with countries with lower inflation rates. For more on these topics, look to these blog posts from Ana Maria Santacreu and YiLi Chien.
Other factors include the amount of public debt. If national debt gets too high relative to national income, it raises the chance a country will create more currency to pay its bills. This can cause a currency to weaken, as the supply of currency increases and/or the demand falls as people sell their own currency for other nations’ currencies.
Finally, overall economic strength plays a role, as countries with robust and stable economies will be more attractive to investors, which increases demand for its currency as more business is conducted within its borders.
How these graphs were created: For the first graph, search FRED for “Swiss Franc to US Dollar” and click on Swiss Francs to US Dollar Spot Exchange Rate. Then click “Add Line” in the “Edit Graph” section, search for “Canadian Dollar to US Dollar Spot Exchange,” and click “Add data series.” Then adjust the time frame to the past 3 years. For the second graph, search for “US Dollars to Euro Spot Exchange Rate” and click on the first option. Then click “Add Line” in the “Edit Graph” section, search for “US Dollars to UK Pound Sterling Spot Exchange Rate,” and click “Add Series.” Then adjust the time frame to the past 3 years.
Suggested by Charles Gascon and Jack Fuller.
FAQs
A currency's strength is determined by the interaction of a variety of local and international factors such as the demand and supply in the foreign exchange markets; the interest rates of the central bank; the inflation and growth in the domestic economy; and the country's balance of trade.
Is it better to have a strong or weak currency? ›
In short, a stronger U.S. dollar means that Americans can buy foreign goods more cheaply than before, but foreigners will find U.S. goods more expensive than before. This scenario will tend to increase imports, reduce exports, and make it more difficult for U.S. firms to compete on price.
What does it mean when the dollar weakens? ›
Essentially, a weak dollar means that a U.S. dollar can be exchanged for smaller amounts of foreign currency. The effect of this is that goods priced in U.S. dollars, as well as goods produced in non-US countries, become more expensive to U.S. consumers.
Is the British Pound a strong currency? ›
Currency Code: GBP
The British Pound Sterling, often simply referred to as the Pound, is one of the most traded currencies in the world. Its strength stems from the UK's significant financial services sector, political stability, and robust economic policies.
Is the U.S. dollar strong or weak right now? ›
The US Dollar holds on to gains ahead of the US trading session on Monday. Comments from Fed's Waller and the mixed Nonfarm Payrolls print are enough to fuel a stronger US Dollar for now. The US Dollar Index pops above 101.50 and looks to be heading towards 101.90 for a test.
Is the Swiss franc stronger than the U.S. dollar? ›
8. (tie) Swiss Franc (CHF) The Swiss franc is tied for eighth among the strongest currencies in the world, with 1 franc buying 1.08 dollars (or $1 equals 0.92 Swiss franc).
What is the weakest currency in the world? ›
Iranian Rial (IRR)
Currently, the Iranian Rial is considered the world's least valuable currency. This is the result of factors like political unrest in the country.
Who benefits from a weak currency? ›
A weak currency may help a country's exports gain market share when its goods are less expensive compared to goods priced in stronger currencies. The increase in sales may boost economic growth and jobs while increasing profits for companies that are conducting business in foreign markets.
Where is the American dollar worth the most in 2024? ›
Monthly USD exchange rate against currency of 55 economies in Big Mac Index 2024. One United States dollar was worth over 15,000 Indonesian rupiah in March 2024, the highest value in a comparison of over 50 different currencies worldwide.
What is the strongest currency in the world? ›
1. Kuwaiti dinar. Known as the strongest currency in the world, the Kuwaiti dinar or KWD was introduced in 1960 and was initially equivalent to one pound sterling. Kuwait is a small country that is nestled between Iraq and Saudi Arabia whose wealth has been driven largely by its large global exports of oil.
It's possible that demand for U.S. goods abroad would decrease if international consumers can't afford to buy those goods. American workers could then be negatively impacted. “The people who benefit from the strong dollar are usually different people than would benefit from the weak dollar,” James said.
Who benefits from a strong dollar? ›
A strong dollar is good for the American economy. Not only does a strong dollar mean that there is a healthy demand for American-made goods and services, but, perhaps more important, it's also a show of confidence in the U.S. government and financial institutions.
What is the most stable currency in the world in 2024? ›
The Swiss Franc (CHF), the currency of Switzerland and Liechtenstein, is widely regarded as the most stable currency in the world.
Where is the U.S. dollar worth the most? ›
Some of the countries where a dollar is worth the most money include Mexico, Peru, Chile, and Colombia. It's possible to exchange dollars for local currency in these countries at favorable exchange rates.
Which country's money is most valuable in the world? ›
Kuwaiti Dinar (KWD) is the world's most valuable currency.
What determines a weak currency? ›
Weak currencies are often thought to be those of nations with poor economic fundamentals or systems of governance. A weak currency may also be encouraged by a country seeking to boost its exports in global markets.
How do you measure currency strength? ›
There are two types of currency strength calculations: fundamental based, and price based. Generally, price based currency strength is calculated from the USDX, which is used as a reference for other currency indexes. The basic idea behind indicators is "to buy strong currency and to sell weak currency".
How do you compare which currency is stronger? ›
Interest Rates
This is one of the first factors considered when evaluating the strength of a currency. Interest rates are the amount needed to borrow money and high-interest rates mean it would cost more to borrow a particular currency while lesser interest rates would encourage borrowing and can stimulate an economy.
What is an example of a strong currency? ›
What are the top 10 strongest currencies?
| Position | Currency | Country |
|---|
| 1 | Kuwaiti dinar | Kuwait |
| 2 | Bahraini dinar | Bahrain |
| 3 | Omani rial | Oman |
| 4 | Jordanian dinar | Jordan |
6 more rowsApr 16, 2024
