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A weak currency talks about the legal tender of a nation that has seen its value diminish in comparison to other currencies. Typically, weak currencies are those from countries with poor economic fundamentals or systems of governance. In practice, currencies weaken and strengthen against each other for different reasons. But economic fundamentals do have an important role.
In addition to that, fundamentally weak currencies usually share several common traits. And this can include a high rate of inflation, budget deficits, chronic current account, and slow economic growth. Nations with weak currencies might also have much higher levels of imports than their exports. As a result, it has more supply than demand for such currencies on international foreign exchange markets, if they are traded freely. Then, while a temporary, weak phase in a major gives a pricing advantage to its exporters, this could be wiped out by other systematic issues.
Supply and Demand Rule
Similar to all assets, supply and demand rule the currency. If the demand for something goes up, so does the price. When a lot of people convert their currencies into yen, for instance, the price of yen goes up. After that, the yen becomes a strong currency because they need more dollars to buy the same amount of yen, making the dollar a weak currency.
After all, the currency is a kind of commodity. For example, if a person exchanges dollar for yen, he is selling his dollars and buying yen. And because a currency’s value always fluctuates, a weak currency means more, or fewer items might be purchased at any given time. And if an investor needs $100 for getting a gold coin one day and $110 for buying the same coin the next day, this means that the dollar is a weakening currency.
Pros and Cons
Furthermore, a weak currency might help a country’s exports gain market share when its goods are less expensive than products priced in stronger currencies. Aside from that, the increase in sales may boost economic growth and jobs; at the same time, it increases profits for companies doing business in foreign markets.
For instance, when purchasing American-made items becomes less expensive compared to buying from other countries, American exports tend to increase. Contrarily, if the value of a dollar strengthens against other currencies, exporters experience greater difficulties in selling American-made products overseas.
Currency strength or weakness can be self-correcting. Because they need more of a weak currency when purchasing the same amount of goods priced in a stronger currency. Without a doubt, inflations will climb as nations import goods from countries with stronger currencies. Eventually, the currency discount might spur more exports and develop the domestic economy, given that there are not systematic issues weakening the currency.
On the other hand, low economic growth may end up in deflation and become a bigger risk for several countries. If consumers start to expect regular price declines, they might postpone spending, and businesses may delay investing. Then, a self-perpetuating cycle of slugging economic activity starts, and that will eventually affect the economic fundamentals supporting the stronger currency.
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