By answering these questions, which often revolve in the minds of people with their various segments, interests, and specializations, economists confirm to “Economy Sky News Arabia” that currency rates are determined by two main methods, namely the floating rate and the fixed price, and that there are many local and international factors that strongly control Currency such as demand and supply, interest rates, inflation, growth in the local economy, trade balance, and others.
Experts point out that the US dollar is the strongest currency in the world, and it is still the cornerstone of the global economy since the middle of the twentieth century, especially after the Bretton Woods Agreement in 1944.
How are currency rates determined?
Dr. Nevin Hussein Shammat, a specialist in international economic affairs, explains to “Sky News Arabia Economy” that currency prices can be determined in two ways, namely the floating price and the fixed price, noting that “determining the floating price is done through supply and demand in the global currency markets, so if the demand for the currency If it is high, its value will rise, and if it is low, this will lead to a depreciation of the currency, and the fixed price is determined by the government through its central bank, where the price is determined against another major global currency such as the US dollar, the euro, or the yen, and to maintain the exchange rate, the Governments buy and sell their currency in exchange for the currency they are pegged to.
Most of the world’s currencies are floating
The changing prices are determined by the forces of supply and demand in the market, and severe movements in the short term can lead to the intervention of central banks, according to Dr. Shamt, who noted that there are several factors that affect exchange rates such as the interest rate, the unemployment rate, the inflation rate, and the gross domestic product, In addition to rumors and disasters that affect the daily supply and demand for currency, and most of the major world currencies are considered floating, central banks and governments may intervene if the country’s currency becomes too high or too low.
The risk of currency appreciation or depreciation
According to Dr. Shamt, a specialist in international economic affairs, a very high or very low currency affects the country’s economy negatively, especially on foreign trade, the ability to pay debts and the country’s credit position, pointing out that the very low value of the currency against the dollar, for example, leads to an increase in the import bill as well. It weakens the ability to repay debts, which will affect the country’s credit position in global reports, but if the currency value is too high, this will lead to the loss of the competitive advantage for exports, which will have a negative impact on the country’s foreign trade.
The most important factors controlling the strength of the currency
In turn, the economist Ali Hammoudi explains that determining the strength of the currency is done through the interaction of a variety of local and international factors, foremost of which are:
- Interest Rates: High interest rates help boost the strength of the currency because foreign investors can get a higher return by investing in this country.
- Economic Policies: Strict fiscal discipline and anti-inflationary monetary policies help to enhance the strength of the currency.
- Stability: The presence of a strong and stable government with a well-established rule of law and a history of constructive economic policies is one of the factors that attract investment and thus enhance the strength of the currency, and in the case of the US dollar, its strength is further enhanced by the fact that commodities are generally traded in dollars such as oil Wheat, sugar, etc. Many countries use the dollar as their reserve currency.
The stability of the currency is more important than its strength
And speaking of stability, governments and monetary policy makers often seek to stabilize their currencies more than make them strong, because a strong currency makes a country’s exports more expensive, which harms the trade competitiveness of that country, and on the other hand, a weak currency makes imports more expensive, which leads to Increasing domestic inflation, so the ideal path is to aim for the middle and avoid destabilizing fluctuations, according to Hamoudi.
Currencies between appreciation and strength
In response to a question about the existence of strong currencies such as the Japanese yen, whose value is less than the currencies of other countries whose economy is not as strong as the Japanese economy such as the Kuwaiti dinar, economist Hamoudi answers: “There are several reasons for this situation, in how the currency price and the strength of the economy are determined, and as for the Kuwaiti dinar, its price is fixed and specific By the Central Bank, meaning that it is linked to a basket of foreign currencies, including the dollar, and is not affected by the economic law of supply and demand that is customary in other currencies, including the Japanese yen, and therefore the dinar derives its strength from the dollar, in addition to the fact that the Kuwaiti economy depends heavily on oil exports, which constitute the majority The vast majority of the state’s income and profits, as oil is still a very important commodity for all countries of the world, while the Japanese yen is a very old currency and derives its strength as a free currency from the strength of the Japanese economy, which is classified as the third largest economy in the world, in addition to the fact that the Japanese economy achieves trade surpluses It is here that the yen derives its strength, as many investors consider it a safe haven asset.
Hammoudi attributes the position of the dollar as the most powerful currency in the world to the fact that the possibility that the country that prints it (the United States of America) will face bankruptcy is very low, and therefore the dollar represents the largest reserve currency for most central banks in the world. Even China, the second largest economy in the world, invests its global trade surplus by buying US Treasury bonds.
On the other hand, Hamoudi pointed out that there are countries whose currency is somewhat weak, but their economy is strong, such as China, which relies heavily and for many years on exporting its products, which has led it to become the second largest economy in the world, and therefore it is in its interest that its currency (the yuan) be somewhat weak or at a price that it is accustomed to. consumer.
The dollar is the strongest currency in the world.. Why?
For his part, the economist Dr. Abdullah Al-Shennawy indicates that the US dollar has been the cornerstone of the global economy since the middle of the twentieth century, and it can be said that despite the repercussions of the strong dollar globally and the more stringent global financial conditions, the rise or relative stability of the dollar is due to reasons, including Regarding the strength of the US economy and raising interest rates at a steady pace by the Federal Reserve.
However, Dr. Al-Shennawy believes that there are a number of economic fundamentals that are considered a major factor in the appreciation of the dollar, including the rise in US interest rates, the diversity and multiplicity of industries in the US economy compared to the dependence of other countries on a few industries or commodity exports, which makes them more vulnerable to economic cycles. Investors’ confidence and aspiration to buy currencies with high interest rates, which creates a reserve rate of return on their currency exchange, as high interest rates make the currency more attractive and therefore in the growing economic environment, this situation will make traders enjoy a positive view of the rise of the dollar.
And Dr. Al-Shennawy continues: “Consumer spending also drives the American economy, so the expansion of growth creates more jobs and higher wages, and this helps to stimulate the economy significantly, and therefore an increase in the growth rate leads to a higher rate of inflation and expectations of an increase in interest rates, and finally an increase in foreign investment and demand.” of companies outside the US economy is an important factor in strengthening the dollar.
The economist, Dr. El-Shennawy, concluded that there are three factors that control the US dollar:
- Federal interest rate changes: It is the interest rate at which commercial banks lend each other their additional reserves on a one-night basis. It is the basic interest rate to control the money supply from the Federal Reserve, and this affects inflation as well as currency exchange rates, including the dollar.
- The performance of the US economy: the value of the dollar rises if the performance is good, and this is what happened after the steadfastness of the US economy after the Corona pandemic.
- Political instability and unexpected events, as investors tend to transfer wealth to safer and less volatile currencies. In the event of geopolitical uncertainty, investors turn to safe havens such as the dollar.
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