Power Play: Unveiling the World’s Strongest Currency

Highlights and Key Takeaways

• A currency’s strength can be determined by looking at an assembly of known factors, and currency strength is an important consideration for any trader or investor.

• Understanding which are the world’s strongest currencies, and why, allows especially forex traders to capitalize on news or other economic events that impact a currency pair. Understanding the strongest currencies lineup allows for successful extrapolation of likely price movements in the markets.

• The king currency always has an entourage, and the contenders for the throne create their own dynamics too – an important consideration for short term trading, as well as longer term investment in stocks or bonds that are intertwined with those currencies.

Understanding Currency Strength

Defining Currency Strength

The UN officially recognizes only 180 currencies worldwide – not a huge list by any measure. It’s important to realize, however, that a currency’s popularity and even widespread employment don’t automatically equate to strength. In its simplest definition, currency strength is a measure of how much of one currency another can buy, or how much of goods or services can be purchased with the currency. In other words, a currency’s strength is its relative purchasing power. This directly extrapolates into the exchange rate dynamics of the daily forex markets. A currency’s strength can be seen in the quantity of goods or services acquired, or how much of another currency is acquired when it’s exchanged.

The factors that contribute to a currency’s strength are typically a mixed basket of local and international factors. The supply (and demand) in international foreign exchange markets, local interest rates set by the central bank, inflation and growth of the domestic economy, as well as the Balance of Trade of the issuing country all come into play. Typically, a currency’s value, utility, and ‘reserve’ are used to determine strength. In other words, a currency’s relative purchasing power (value), its application as a means of exchange in foreign economies (utility), and its acceptance in international trade (reserve utility) all determine its strength.

Short term traders tend to employ a currency strength meter as their preferred tool to iron out possible variables in determining currency strength. Also, the trading arena will calculate currency strength by looking at either fundamental data (economic data) or price data (current forex trading prices that reflect sentiment). Banks, for their part, look at currency strength to determine a local economy’s health and overall financial stability, and this largely determines their monetary policy.

 In a nutshell:

• Strong currencies experience high demand and grow in value.

• Strong currencies are associated with robust economies, those unlikely to suffer meaningful turmoil from the usual internal or external factors.

• Typically, the uptick in the economic value of a currency allows its holders to buy more products and services, and those providing the goods or services prefer earning that currency as it gives them a local competitive edge in the form of enhanced cash flow and a greater capex ability.

The Importance of Currency Strength

While there are many vantage points from which to discuss the importance of a currency’s strength, looking at the overall economic implications is one point of departure we can all feel, and arguably the most important. In the classic economy scenario:

• Buoyant domestic production creates value within the local economy, leading to a persistent trickle-down effect of citizens enjoying greater purchasing power.

• Things are on the up and up, as they say. The sensation of increased purchasing power extrapolates into increased spending, which increases supply and demand, leading to enhanced international trade volumes.
• With import and export numbers growing, the economy continues its rise, as does the national currency’s strength.

Looking specifically at the business entities holding that national currency, they gain utility in the countries of their trading partners, encouraging those countries’ central banks to create reserves in their currency. The foreign welcome extended to the national currency means a continuing cycle of (hopefully increasing) trade, and also eliminates the need for any mediation by a stronger currency, such as the US dollar. 

We can readily find the opposite scenario in many countries around the world today, where citizens hold both the national currency and the US dollar, with most businesses done in dollars, even at street level. This second-best arrangement is never found in robust economies.

Under circumstances where a currency is growing stronger, should a trading partner’s currency fluctuate, the local currency strengthens in the money markets, and thus gains value in currency pairs. For many, the US dollar is considered the king of currencies, but the historical base for that reality is being eroded, and America’s domestic market – the largest in the world – is being impoverished by a number of internal governance factors. That said, just more than half of all central banks’ reserves, almost half of global debt, and between 80 – 90% of global as well as forex trading is still dollar-denominated.

One unsustainable reality (apart from many other factors chipping away at dollar hegemony) is the fact that many countries borrow in US dollars, only to earn local currency via taxation to service that debt. The strength (and strengthening) of the dollar thus increases the risk of defaults – something that oftentimes leads to a worsening domestic spiral. Although euro-denominated, Greece’s default of 2015 was exactly this kind of foreign-loan-local-tax scenario, collapsing.

Identifying the World’s Strongest Currency

So, who’s really on top? What is, by strict metrics, the world’s strongest currency, regardless of popularity or familiarity? Although most people would struggle to pinpoint Kuwait on the world map, its currency resoundingly trumps all others, and for good reason.

• Kuwaiti dinar (KWD). Although nestled between countries many associate with strife and turmoil, Kuwait has kept its nose clean in comparison and, for a relatively small Middle Eastern state, is positively saturated with oil reserves. Indeed, Kuwait’s concentration on developing its oil and gas exports is the fundamental reason for its currency’s strength. The country’s domestic produce is in demand globally, and you’d be paying $3.24 in exchange for 1 KWD (as on October 31, 2023).

• Bahraini dinar (BHD). Second place goes to a not-too-distant neighbor, Bahrain, and largely for the same reasons – oil, gas, and refined petroleum. Again, the economics here are hard to beat – tons of fuels that everybody needs, all of the time. It makes for an economy hard to emulate, and a very strong currency.

• Omani rial (OMR). Staying in the ‘crude oil club’ neighborhood, Oman has similar dynamics, sitting as it does on top of vast oil reserves, and also carefully maintaining a huge US dollar reserve.

• Jordanian dinar (JOD). The Jordanian dinar’s strength stems from the fact that it’s pegged to the USD. Although this means the local central bank can never fiddle the currency’s value, its strict tie to dollar value sees it riding high. With modest oil and gas reserves, the currency is largely what it is today because of its lockstep with the fate of the US dollar.

Factors Influencing the Strength of a Currency

There are certain fundamental economic factors that contribute to currency strength, including gross domestic product (GDP), set interest rates, inflation, and the political landscape, among others.

Here follow the most important contributors:

• Economic recession or expansion. We’ve depicted a blossoming economy above, but when a country witnesses recession, the currency also depreciates. This happens on the back of interest rates being lowered in a recession (recessions being an almost inevitable byproduct of the cycle of business expansion and contraction). Very few regimes have managed to avoid recessionary bouts completely, and when interest dips, investment flees the currency to seek higher returns elsewhere. This impacts the currency’s value, and its strength wanes.

• Inflation. Another unavoidable byproduct of the monetary system as we know it, inflation happens when there is a noticeable, across the board increase in the prices of products and services. Everything goes up, not just luxury items. In its simplest depiction, inflation means you can buy less today for the same amount of money than you could last week, or last month. Inflation erodes the value of a currency over time, thus weakening it.

• Interest and exchange rates. Returning to interest rates, these can be ‘tweaked’ by central banks when factoring in inflation and desired exchange rates. These parties influence exchange rates by manipulating the interest rate for the purposes of managing inflation. This phenomenon can result in what traders call “hot money”, where a central bank hikes rates and attracts global investment in the currency because of attractive returns.

• Government (‘Public’) Debt. Any county can incur large loans to finance public sector projects that can boost, or are needed to simply maintain, the local economy. A large public deficit and extensive government debt make for a poor debt rating, something that influences at what rate the local currency will be exchanged. Even when secured, the potential for default on such loans can result in either the government printing money to service the debt (unattractive to everyone!) and/or investors selling off the currency’s bonds, resulting in a lower exchange rate.

• Terms of Trade. Also called the “Balance of Trade”, it’s the difference over a measured period of time between the monetary value of a country’s imports versus exports. These terms are deemed to be improving if the value of exports increases faster than imports, as that denotes increasing revenues, and an associated demand for the local currency, raising its value.
• Current account deficit. In simple terms, the current account deficit of a country is akin to the Terms of Trade (ToT), but in addition to imports and exports, the deficit factors in payments for foreign investments, dividends received from such investments, aid, and sundry remittances. In a nutshell, no country wants a large deficit, as this invariably weakens the currency value.

Finally, there are three factors usually deemed closely aligned – a country’s political stability, confidence (internal business confidence as well as external perceptions), and speculation.

• Political stability is self-explanatory, as no sane investor associates with a currency steered by whimsical politicians, legitimate or illegitimate, running the show. Political turmoil is a killer of currency value. While those with a greater appetite for risk might speculate on politically unstable currencies, the vast majority rightly prefer a stable political environment in which to invest, such investment also resulting in an appreciation of the local currency.

• Confidence and speculation go hand in hand, and this input is most easily depicted as the sentiments afloat in financial markets. In other words, if, for example, an interest rate hike is mooted by the Federal Reserve, speculators will take out forward contracts on the US dollar, hoping to escape volatility and gain on the looming hike down the line, likely causing the currency to appreciate in value. Although seemingly ephemeral to newcomers to the markets, sentiment can have a huge impact on the exchange rates of currencies.

The Impact of the World’s Strongest Currency

The Kuwaiti dinar (KWD/USD) has, in fact, been pegged to a basket of other (undisclosed) currencies since 2007. Although this sounds similar to the Jordanian dinar’s pegging to the USD, the domestic dynamics are entirely different. Indeed, while it would be more apt to describe the “pegging” of the KWD as articulate management, the facts remain that the country has enviable foreign currency earnings (and reserves), it enjoys a very stable exchange rate against other prominent global currencies, and is backed by compelling fundamentals.

Not widely employed as a tool of speculation, the KWD nonetheless experiences high demand. This is because of Kuwait’s massive oil export capabilities, and the fact that its generous revenues are wisely spent, and this in turn makes the KWD very valuable. The high global demand for oil generates a high demand for the currency. Although the USD remains the world’s reserve currency and is more widely accepted, the KWD is the jewel in the crown. It has no resounding impact on global trading, as the USD is far more promiscuous and commonplace, based on the respective currencies’ history and current homeostasis, although it certainly sets the bar for all others.

Other Strong Currencies on the Global Stage

A few other strong currencies worth noting include:

• Gibraltar pound (GIP). The currency of another locale many might struggle to identify on a world map, the GIP is only really employed on the island of Gibraltar. With a long history of British entanglement, the GIP remains pegged to the British pound, hence its welcome reception and high ranking among currencies.

• Cayman Islands dollar (KYD). Somewhat pegged at a fixed rate of exchange to the USD at 1/1.2 (KYD/USD), the Cayman Islands have also managed to set the country as a powerful offshore investment destination that lacks corporate taxation, among other attractions.

• Swiss franc (CHF/USD). A common currency for forex traders, the Swiss franc has the backing of centuries of wily money management of the Swiss banking fraternity behind it. Switzerland is ranked as the seventh richest country in the world, based on GDP per capita. Solid history, solid current performance.

• Euro (EUR). Although a relative newcomer, the euro’s emergence traded on the collective clout of western Europe, hence maintaining a strong showing on the back of some of the world’s strongest economies. Indeed, the euro maintains a slight edge on the USD in money markets.

• US dollar (USD). The history of the USD being positioned as the petrodollar and world reserve is well known, and having attained that title, it will take a long time for it to be fully eroded, if ever that comes to pass. The currency of the largest consumer market on the planet, the USD retains its allure (in spite of the Fed monetizing debt hand over fist), and as noted above, it dominates global trade to this day. No one minds taking dollars.

Conclusion

It’s important for forex traders and investors, both large and small, to understand currency strength determinants in the context of global economics. Perhaps especially for forex traders, understanding the underpinnings of various top currencies’ value allows for skillful trading, as well as avoiding looming dips in longer term speculation. Understanding the factors that impact a currency’s value in global trade, and its innate strength (or weakening), is crucial for minimizing risk and trading with informed analysis. 

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Knowing who sits where in the rankings facilitates winning currency pairs when trading exchange, and also allows for successful longer term investments involving those currencies. Currency strength is an important economic indicator, giving investors a crucial snapshot of a country’s fiscal well-being and overall economic stability. Strong currencies speak of stable economies, where antagonistic inflation and moody interest rates are largely absent.

FAQs

What currency is worth the most? 

Taking the USD as the base value, the Kuwaiti dinar ranks tops. If you could get paid in any fiat currency, this would be the preference, as it exchanges out into a lot more of any other currency in circulation.

What is the most valuable currency?

Again, the KWD ranks tops, although many not involved in the oil trade might rank the USD higher, simply because it is known and accepted anywhere, and to this day maintains its hegemony as the world’s reserve. The USD or euro might indeed be more practically valuable to many, no matter that the KWD is stronger and the actual king.

Why is the euro stronger than the US dollar?

The euro is governed by the policies of the European Central Bank. Setting as it does the policies for the entire Eurozone, and not a singular national government, this body and management structure maintains the overall ranking of the euro.

What happens if the US dollar collapses?

The short answer? Bad things! Because of the very global nature of economic activity, and the fact that the dollar acts as the currency of such a massive swathe of international transactions, any dent in the dollar would shake worldwide trade and investing, severely jolting global financial stability. A hodgepodge of domestic and international inflationary scares would likely ensue from an abrupt decline in the dollar, and only the very fortunate or very skilful would be able to steer a local economy through such times without a substantial domestic dip.