Over 180 currencies around the world and only 4 major pairs rule the world, EUR/USD, USD/JPY, GBP/USD, and USD/CHF. The most common currency in all 4 pairs and the world’s dominant reserve currency since WWII is the USD, but is it the most valuable? No. There are other currencies that are valued more than the USD (see the list below).
1. Kuwait Dinar= USD 3.2775
2. Bahraini Dinar= USD 2.6487
3. Omani Riyal= USD 2.59
4. Jordanian Dinar= USD 1.4093
5. British Pound = USD 1.2365
6. Cayman Islands Dollar= USD 1.2191
7. European Euro= USD 1.10012
8. Swiss Franc= USD1.1
*Source: TradingView (2/2/2023, 11:00 AM)
Fundamentally, a currency's higher value relative to others shows increased demand and, as a result, increased economic activity, and vice versa. Moreover, Interest rates, inflation, capital flows, and money supply are all factors that affect a currency’s value. However, it is crucial to remember that a higher exchange rate of a currency relative to others does not always imply a healthier economy. Depending on the state's policy whether having a fixed/pegged, flexible/floating, or managed floating exchange rate system, a country may opt to regulate the appreciation of its currency in order to have a comparative advantage in terms of trade with others. A cheaper currency equals cheaper goods and services.
In macroeconomic terms, most Arab countries with an expensive currency have a common factor, the “oil and gas market”. For decades, the Gulf region has ranked high in terms of GDP due to its vast oil reserves, which have boosted the region's purchasing power and contributed to developing its economy. The term “Dinar” originates from the ancient Roman coin “denarius” which was worth 10 assets.
In 2007, Kuwaiti Dinar was pegged to a basket of currencies with the USD being said to have the highest weight in the basket. Kuwait is one of the largest countries in the oil market accounting for nearly 50% of its GDP, and it holds almost 7% of global oil reserves, and its oil production in December 2022 represented around 6% of the total OPEC+ production. Kuwait generates enough revenues from the oil market to the extent that they do not impose VAT on its citizens.
Omani dinar follows a managed float exchange system after being pegged to the USD for years. The system allows the government to interfere at times of high volatility to stabilize the currency. The Omani economy also depends profoundly on oil production which strengthens its currency’s value as well.
Unlike its counterparts, Bahrain does not heavily rely on the oil and gas market. It rather has a completely functional tourism sector as well as a financial sector. However, the currency is also pegged to the USD which does not reflect the global demand and supply of the currency, instead, it rises and falls in lockstep with the USD. The fixed rate; however, implies that the country should always have a sufficient amount of dollar reserves. The Jordanian Dinar has a high value because the government maintains stable exchange rates implying a stable economic environment. Jordan, unlike its neighbors, does not rely largely on oil exports.
However, if we looked at the world’s official foreign reserves (See figure 1 below), we will not see most of these currencies on the list. But rather we would see those of the world’s largest economies including the USA, Euro Area, China, Japan, Great Britain, Australia, Canada, and Switzerland with the USD, EUR, and GBP as the top 3 active currencies for international payments in 2021 based on transaction value based on Statista Data. In December 2021, more than seven out of ten SWIFT payments were made in either the euro or the US currency.
Figure 1: World Official Foreign reserves by currency from Q2’21-Q3’22 (USD-Bn)| Source: the Currency Composition of Official Foreign Exchange Reserves (COFER) by the International Monetary Fund (IMF).
Some strong economies might choose to peg their currency at a low rate in purpose to have a comparative advantage relative to others such as China, the most industrialized country in the world. Pegging the yuan is a calculated policy choice that benefits the Chinese economy significantly; it has demonstrated the effectiveness of its currency peg over a long period of time by increasing the attraction of Chinese goods on the international market.
In conclusion, a strong currency is such a subjective term...
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