Understanding Strong Currency: Good or Bad for a Country?
Strong currency can be a double-edged sword, offering both advantages and disadvantages for a country. Whether it's beneficial or detrimental largely depends on the reasons behind its strength and the economic fundamentals of the nation.
Relative Nature of Currency Strength
A strong currency is inherently relative, just as the value of a product decreases when the local currency strengthens. From a seller's perspective, a strong domestic currency means that their products become more expensive for foreign buyers. Conversely, for buyers, a strong currency can offer better purchasing power. However, the concepts of "strong" and "weak" currency are often misleading.
What truly matters is the exchange rate during the transaction and the overall value to both parties involved. Unfortunately, the terms "strong" and "weak" have been overused and carry inherent connotations.
Economic Strength vs. Political Manoeuvres
The strength of a currency often reflects the economic health of a country. A strong currency, like that of Germany, Switzerland, and Japan, typically results from a robust economy with a solid industrial base and stringent economic fundamentals.
However, when a strong currency is the result of political decisions, such as those made by the UK or Portugal, it can be seen as a vanity move or an attempt to boost economic performance, which can be less sustainable.
According to expert insights, economic fundamentals must always precede exchange rate fluctuations. The health and stability of the economy should be the foundation upon which currency strength is built.
Stability and Prosperity in a Strong Currency
Switzerland is a prime example of a nation with a strong and stable currency. Its currency is often regarded as expensive, but its stability is a significant advantage. The Swedish krona, on the other hand, despite being less expensive, is highly stable, making it even more attractive for both low and high-income individuals.
Sweden's stability is a draw for foreign investors who seek a zero or negative interest rate environment. During the pandemic, the Swedish central bank, Riksbanken, engaged in significant monetary policy, issuing money with nearly no limits and maintaining a zero interest rate. Despite this, Sweden's total debt is low, and its strong industrial base, including global corporations like ABB, Volvo Cars, Ericsson, Assa Abloy, Electrolux, and more, further cements its strength.
The combination of economic stability and a strong industrial base positions countries like Switzerland and Sweden to thrive in a global market. Their currency strength is a testament to their economic health and the confidence investors place in their future.
Conclusion
In summary, a strong currency can be advantageous if it is a result of a robust and stable economy, as seen in Switzerland and Sweden. However, a strong currency resulting from political decisions or unsupported by sound economic fundamentals can be a transient and potentially harmful phenomenon.
Ultimately, understanding the underlying factors behind currency strength is crucial for any nation seeking to benefit from its economy's full potential. Economic stability is key, and nations should focus on building a solid foundation rather than pursuing fleeting currency strength for political or vanity reasons.