4 Valuable Points To Make Currency Strength Tougher for a Better Economy

4 Valuable Points To Make Currency Strength Tougher for a Better Economy

Currency strength is vary for each country, some are strong and valuable while some are less powerful and has smaller value. Currency is a medium of exchange for goods and services, it is money that you know and love, in the form of paper or coins. Currently, the strongest and the most important currency in the world are the US dollar (USD), the Japanese yen (JPY) and the euro (EUR), they are so loved in the foreign exchange market. You might be wondering how can a currency get stronger than the rest, we would like to know too, so let’s get to it.

Sell Foreign Exchange Assets and Buy Their Own Currency

This might sounds funny, but one of the tactics to make a stronger currency strength is to make other currency weaker, so perhaps in the end, currency equality would never happened. How exactly are we supposed to do that you might ask, we can do that by selling foreign exchange assets and buying foreign currency. It goes like this, if a currency is bought by a country and they sold back the currency and bring the profit back to the country, it will devalue the said currency, while the currency strength in the said country will increase in value.

Foreign exchange market, a gamble with currency strength as a prize
Foreign exchange market, a gamble with currency strength as a prize

For example, China has over $1.4 trillion of US government bonds right now. If the Chinese sold these Treasury bills and brought back the profit back to China, this would cause a devaluation in the dollar, and the Chinese Yuan would increase in currency strength. With this method, supply of dollars would rise, and demand for Chinese Yuan would increase, it can cause a reasonably significant fall in the value of the dollar. In the case of Russia and Brazil, they only have relatively limited dollar reserves, perhaps they can choose the next point instead.

Raise Interest Rates of Our Own Currency

 For countries like Russia and Brazil who has a relatively limited dollar reserves, perhaps they can try to increase the interest rates in their country for a better currency strength, Ruble and Real. Interest rates is the percentage of amount charged by the lender for the use of its money. Higher interest rates will attract “hot money flows”, it happens when banks and financial institutions move money to other countries to take advantage of a better rate of return on saving. There is a side-effect to this method however which can reduce economic growth.

As a drawback, higher interest rates may reduce the rate of economic growth, basically it was because everything will get more expensive and will reduce investment and buying power of the poeple, leads into a lower economic growth. This might not be a good choice to raise currency strength due to the side effect on economic growth. The economy sure is booming, higher interest rates would increase the value of a currency, but it put the economic growth on too much risk, so let’s move on to the next one.

Speaking of currency, you might also interested in: The Silly Circumstances of Zimbabwean Dollar: Z$10 Billion for a Burger

Reduce Inflation and Increase Export

Reducing inflation is a really difficult task, but if it can be pulled off, it can increase currency strength of a country for a long term. If inflation is relatively lower than competitors, then the countries goods will become more attractive and demand will rise. To reduce inflation, the government / Central bank can pursue tighter fiscal and monetary policy and also supply-side policies. Some method to reduce inflation might cause backlash, for example, controlling inflation through wage and price controls can cause a recession and cause job losses.

The increase of export might help to build stronger currency strength

Photo is taken from: HIS Consulting
The increase of export might help to build stronger currency strength
Photo is taken from: HIS Consulting

Exports can also came in handy in increasing currency strength, where a country seeks economic development by opening itself up to international trade. Exports and trade have been a major component of world economic growth, and the high interest rates earlier, it could actually help to increase exchange rates in which later will reduce export competitiveness. Beside, If you import more than you export, more money is leaving the country. Meanwhile, the more a country exports, the more domestic economic activity is occurring.

Long-term Supply-side Policies

For a recap, to build a stronger currency strength, a country might need a stronger exchange rate, low inflation, productivity growth, economic and political stability. Those are the economic fundamentals to build a long term currency strength. So yes, it is a very hard job to build a strong currency strength, India has high-interest rates, but that won’t be enough because investors would be concerned about the high inflation in the Indian economy. So the last one is long-term supply-side policies.

To increase the value of the currency in the long-term, the government will need to try supply-side policies. This policy is required to to increase competitiveness and cut costs of production. Privatisation (when a government-owned business, operation, or property becomes owned by a private, non-government party) and cutting regulations may help the export industry become more competitive in the long-term.

To keep an update on the world’s currencies, you might visit this Web Site here.

1 Comment

Post A Comment