What is better a higher or lower exchange rate?
A lower-valued currency makes a country's imports more expensive and its exports less expensive in foreign markets. A higher exchange rate can be expected to worsen a country's balance of trade, while a lower exchange rate can be expected to improve it.
The terms “higher” or “lower” exchange rate depend on the specific currencies and the context or goals of the parties involved. A higher exchange rate indicates a stronger currency, benefiting importers and travelers from the stronger currency's country while boosting exporters in the weaker currency's region.
A lower exchange rate lowers the price of a country's goods for consumers in other countries, but raises the price of imported goods and services for consumers in the low value currency country.
A higher exchange rate is generally better as we get more for our local currency when buying. This means we can get more of the foreign currency for our local money. On the flipside, a lower exchange rate is better if we want to exchange foreign currencies back into local currency after our overseas trip.
Devaluation occurs when a country creates a downward adjustment of its currency value to balance trade. Devaluing a currency reduces the cost of a country's exports and makes imports less attractive. As exports increase and imports decrease, there is typically a better balance of payments as the trade deficit shrinks.
Higher rates can make it more expensive to borrow, and more rewarding to save, reducing demand and slowing inflation. Higher interest rates can increase a currency's value. They can attract more overseas investment, which means more money coming into a country and higher demand for the currency.
A strong dollar or increase in the exchange rate (appreciation) is often better for individuals because it makes imports cheaper and lowers inflation. This gives individuals more purchasing power in the world marketplace. This often leads to a better standard of living.
However, a country should be wary of the negatives of currency devaluation. Currency devaluation may lower productivity, since imports of capital equipment and machinery may become too expensive. Devaluation also significantly reduces the overseas purchasing power of a nation's citizens.
A strengthening U.S. dollar means it can buy more foreign currency than before. For example, a strong dollar benefits Americans traveling overseas because $1 buys more; however, this would disadvantage foreign tourists visiting the U.S. because their currency would buy less.
In the goods market, a positive shock to the exchange rate of the domestic currency (an unexpected appreciation) will make exports more expensive and imports less expensive. As a result, the competition from foreign markets will decrease the demand for domestic products, decreasing domestic output and price.
Do higher rates make the dollar stronger?
When the Federal Reserve increases the federal funds rate, it typically increases interest rates throughout the economy, which tends to make the dollar stronger. The higher yields attract investment capital from investors abroad seeking higher returns on bonds and interest-rate products.
The exchange rate gives the relative value of one currency against another currency. An exchange rate GBP/USD of two, for example, indicates that one pound will buy two U.S. dollars. The U.S. dollar is the most commonly used reference currency, which means other currencies are usually quoted against the U.S. dollar.
In order to make a profit, banks and other money changers use different rates for buying and selling currency. The online rates you see are probably mid-rates - half-way between the buying and selling rates. Of course, just to be on the safe side, banks also charge commission on the transaction...
The Kuwaiti dinar continues to remain the highest currency in the world, owing to Kuwait's economic stability. The country's economy primarily relies on oil exports because it has one of the world's largest reserves. You should also be aware that Kuwait does not impose taxes on people working there.
Currency depreciation, if orderly and gradual, improves a nation's export competitiveness and may improve its trade deficit over time. But an abrupt and sizable currency depreciation may scare foreign investors who fear the currency may fall further, leading them to pull portfolio investments out of the country.
But on the other hand, if a country relies heavily on exports, an appreciating currency isn't such a great thing. When a currency appreciates, the exports from a country that use that currency will decrease because all of those goods are more expensive to countries other currencies.
1. Iranian Rial (IRR) 1 INR = 505 IRR. The Iranian rial tops the list of the cheapest currencies in the world. The fall in the value of the currency can be explained by various factors.
Kuwaiti Dinar or KWD has been crowned the highest currency in the world. It is widely used in the Middle East for oil-based transactions. 1 Kuwaiti Dinar is equal to 268.97 INR.
Head to your bank or credit union before you leave to avoid paying ATM transaction costs. You may even receive a better exchange rate. Credit unions and banks will exchange your dollars into a foreign currency before and after your trip when you have a checking or savings account with them.
In short, a stronger U.S. dollar means that Americans can buy foreign goods more cheaply than before, but foreigners will find U.S. goods more expensive than before. This scenario will tend to increase imports, reduce exports, and make it more difficult for U.S. firms to compete on price.
Why the U.S. dollar is so strong?
Many investors see the dollar as the safest asset to hold when stock and bond markets turn volatile. That's partly because the dollar has a unique status as the world's "reserve currency." This means central banks and financial institutions around the world hold lots of dollars to use for international transactions.
A weaker dollar, however, can be good for exporters, making their products relatively less expensive for buyers abroad. Investors can also try to profit from a falling dollar by owning foreign-currency ETFs or investing in U.S. exporting companies.
A falling dollar diminishes its purchasing power internationally, and that eventually translates to the consumer level. For example, a weak dollar increases the cost to import oil, causing oil prices to rise. This means a dollar buys less gas and that pinches many consumers.
In general, when a currency loses value, people's purchasing power declines as well because products — especially imported ones — cost more money. And when that causes a general rise in prices, it's called inflation.
The weakest currency in the world is the Iranian rial (IRR). The USD to IRR operational rate of exchange is 371,992, meaning that one U.S. dollar equals 371,922 Iranian rials.
