Understanding Currency Strength: USD vs SGD vs IDR Explained

When evaluating the strength of currencies like the U.S. Dollar (USD), Singapore Dollar (SGD), and Indonesian Rupiah (IDR), it's important to understand the underlying factors and tools that can help you determine which is the strongest. This guide will walk you through the process of comparing currency strength using exchange rates, common currency conversion, and economic indicators.

Exchange Rate Comparison

One of the primary ways to assess the relative strength of a currency is by looking at exchange rates. The exchange rate is the rate at which one currency can be exchanged for another. For instance, if you are comparing USD and SGD, you would check how many SGD you can get for 1 USD and vice versa. A lower number of a currency per unit of another currency typically indicates that the first currency is stronger.

Base and Quote Currency

In an exchange rate like USD/SGD 1.35, USD is the base currency, and SGD is the quote currency. This means that 1 USD is worth 1.35 SGD. Similarly, if you see a rate like SGD/IDR 10000, it means that 1 SGD is worth 10000 IDR. In this case, SGD is considered stronger than IDR, as it takes a large number of IDR to equal a single SGD.

High Numbers and Strength

It's crucial to understand that just because an exchange rate is in triple or quadruple digits, it does not automatically mean the currency is stronger. For example, if 1 SGD 10000 IDR, it clearly shows that SGD is stronger than IDR, despite the large numbers involved. This concept is important because it helps avoid the common mistake of assuming that higher numbers equate to greater currency strength.

Relative Strength Using a Common Currency

To compare the strength of different currencies, such as USD, SGD, and IDR, it is often helpful to use a common currency. Here’s an example where both SGD and IDR are converted to USD:

SGD to USD: If the exchange rate is SGD/USD 0.74, this means 1 SGD is worth 0.74 USD. IDR to USD: If the exchange rate is IDR/USD 13700, this means 1 USD is worth 13700 IDR.

By converting both SGD and IDR to USD, we can easily determine their relative strengths:

1 USD to SGD and IDR:

1 USD 1.35 SGD (as we established earlier)

1 USD 1/0.74 SGD × 13700 IDR/SGD 18600 IDR (this shows that USD is stronger than IDR)

Purchasing Power Parity (PPP)

The Purchasing Power Parity (PPP) is an economic theory that suggests that in the long run, exchange rates should adjust to equalize the purchasing power of different currencies. For example, if a cup of coffee costs 10 SGD in Singapore and 0.5 USD in the United States, and the PPP rate is USD/SGD 1.35, it suggests that the market exchange rate is consistent with the relative cost of a cup of coffee.

Market Trends and Economic Indicators

Understanding the underlying economic conditions, such as inflation rates, interest rates, and political stability, is crucial for determining long-term currency strength. Political and economic stability can significantly influence a country's currency over time. Factors like a country's GDP growth, inflation rate, central bank policies, and geopolitical events can all impact currency strength.

Example: USD, SGD, and IDR

Let’s continue with the example using more precise values:

Exchange Rates:

1 USD 1.35 SGD 1 SGD 10000 IDR Thus, 1 USD 1.35 SGD × 10000 IDR/SGD 13500 IDR

This example clearly shows that the U.S. Dollar is stronger than both the Singapore Dollar and the Indonesian Rupiah.

Conclusion

Understanding currency strength is not just about the numerical value of the exchange rate. It involves a comprehensive analysis of base and quote currencies, high numbers and strength, relative strength using a common currency, purchasing power parity, and market trends and economic indicators. By considering these factors, you can make informed decisions about the relative strength of different currencies, such as whether the U.S. Dollar is stronger than the Singapore Dollar and/or the Indonesian Rupiah.