You might assume the strongest currency would be the U.S. Dollar (USD) or British Pound Sterling (GBP) as both hold significant influence over other currency pairs. In fact the top 10 most traded currencies pairs all include either the U.S. Dollar or the Pound Sterling and the two together devise the most traded currency pair:GPB/USD.
However, strength here refers to value, and as you’ll learn in this article, there are several currencies valued much higher than the U.S. Dollar and Pound Sterling.
It is important to understand how currency strength is determined. Currency strength is measured by the amount of goods and services that can be bought and the amount of foreign currency received in exchange for one unit of the national currency.
What makes a currency strong?
A currency’s strength is determined by many factors including the inflation and growth in its country’s economy and the amount of foreign currency that can be exchange for one unit of said currency.
The U.S. Dollar is widely used as the fixed base currency because of its high utility across foreign markets and largereserves in foreign banks. In fact, U.S. Dollars make up over 60% of the world’s central bank reserves and 90% of all forex trades.
However, the relative holdings of the U.S. Dollar do not make it stronger than other currencies, only more influential. The Japanese Yen (JPY), while valued at around 1 cent when up against the U.S. Dollar, is also considered one of the world’s most influential and stable currencies.
It is important to keep in mind general currency strength, or value, does not always denote a strong economy. To truly judge a currency’s strength, you need to evaluate multiple factors including supply, demand, inflation, and price changes over a long period of time.
How does currency strength affect forex?
In forex trading, a currency’s strength is relative to another foreign currency in the given pair. The U.S. Dollar and the Euro (EUR) are the two currencies with the largest reserves around the world and therefore are among the most impactful currencies on the forex market.
Foreign exchange occurs wholly around the strength of various currencies. This can be seen immediately in how currency pairs are displayed, with the stronger currency listed first and the weaker currency listed second. The spread is then calculated by the ever-changing strength of both currencies.
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Strongest currency pairs
TheEUR/USDpair is arguably the most significant forex pair because both currencies are reserved in large amounts around the world and used in many foreign markets. As mentioned above, the U.S. Dollar is the fixed base currency across the global economy. Likewise, the Euro is the official currency in 19 of the 28 countries in the European Union.
Currency pairsin the forex market are divided into three categories:
- Major currency pairsare the most frequently traded and usually include the U.S. Dollar as either the base or quote currency.
- Minor currency pairsare ones that still have a large volume of trades every day but do not include the U.S. Dollar. These do include one of the world’s other three major currencies: The Euro, Pound Sterling, or Japanese Yen.
- Next areexotic currency pairs. These pairs are less traded than both major and minor pairs. They usually feature one of the four major currencies along a less-frequently traded currency or one from an emerging market. These currencies represent smaller economies that have less liquidity but higher volatility.
Examples of exotic currency pairs include a major and exotic currency like the Pound Sterling and Swedish Krona (GBP/SEK) or two exotic currencies such as the Norwegian Krone and Krona (NOK/SEK).
Difference between a currency and a currency pair
You’d be forgiven for assuming that any “major currency” would be stronger than all others. The general stability and dominance of both the U.S. Dollar and the Euro throughout world markets mean the two currencies have the most influence over foreign economies, but as mentioned, that doesn’t mean they’re the most valuable.
In fact, because of the prominence both the U.S. Dollar and the Euro have in other economies, if they were to sharply rise in value, foreign economies would suffer as a result. Exports from the U.S. and European Union would become more expensive, and imports from other foreign nations would cheapen. Countries like Japan and China frequently buy U.S. Dollars for their own federal reserves to weaken the dollar and keep their exports to the U.S. more valuable.
Currency rates are determined by the amount of demand for that specific currency, and there is plenty of U.S. Dollar to go around. As long as a country is able to export their own products to countries like the United States or those who use the Euro, their own currency will perform well against the two.
There are way too many factors that affect individual currencies and forex pairs to mention them all in this article, but a general indication of how valuable a country’s currency is determined by how valuable its exports are.
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The top 10 strongest currencies
Below is a list of the top ten strongest currencies as of October 2021, you’ll notice the countries all have strong exports or international business dealings that aren’t hampered by competition. On the flip side, some high-export countries like China and India keep their currencies undervalued to remain competitive, as they generally do not hold a monopoly on the products they export.
10:Canadian Dollar(CAD)
Canada’s official currency, colloquially known as the Loonie, is the sixth most traded currency on forex markets. Its value is derived from the country’s wealth of natural resources including crude oil and uranium. However, its value is heavily dependent on the U.S. Dollar, as most of the country’s trade is done with its downstairs neighbor.
9:United States Dollar(USD)
The U.S. Dollar is simultaneously the world’s most traded currency and makes up most federal reserves around the globe. It’s number nine on this list due to the amount of countries and people eager to trade and hold onto the Dollar.
8: Swiss Franc (CHF)
An outlier on this list, the franc did not achieve this placement because of popular exports. Instead, the stability and wealth of Switzerland make it a popular reserve currency. No matter what disasters befall the world, the Swiss Franc is likely to be unaffected, and thus there is a high demand for it.
7:Euro(EUR)
The second largest reserve currency, the Euro is the official currency of the European Union. But you probably already knew that. The economic strength of the 27 countries in the EU give the Euro not just stability but value as well.
6: Cayman Islands Dollar (KYD)
The Cayman Islands placing sixth on this list may seem like a bit of an outlier but consider the sort of business the British overseas territory is best known for. They provide offshore banking licenses for thousands of companies.
In addition, the Cayman Islands Dollar is one of three currencies on this list that maintain a fixed exchange rate to the U.S. Dollar.
5:Pound Sterling(GBP)
The Pound Sterling is the official currency of Great Britain and many of their overseas territories. Some of these territories have their own currencies linked at a one-to-one exchange rate with the Pound.
The Pound specifically is valued higher than the U.S. Dollar because of Britain’s low inflation. At one point the pound was worth nearly five U.S. Dollars, but it has depreciated throughout the last century as Britain lost its vise grip on the world’s economy.
4: Jordanian Dinar (JOD)
The Jordanian Dinar is a significant outlier in this group. Jordan has struggled to grow its economy, and as a nation it holds significant debt. There are few competitive exports coming out of Jordan, however, the Arab country managed to peg its currency to the U.S. Dollar over 20 years ago. This has provided the Jordanian dinar relative stability despite the country’s poor economy.
3: Omani Rial (OMR)
The significant jump in value between the Jordanian Dinar in fourth and the Omani Rial here is due to the country’s strong petroleum production. Sharing the tip of the Arabian Peninsula with Yemen, the country as ample access to the valuable natural resource.
2: Bahraini Dinar (BHD)
Bahrain sits on the Persian Gulf and, like Oman, is a major exporter of crude oil. The country has also pegged its currency to the U.S. Dollar at 2.6008 since 1986.
1: Kuwaiti Dinar (KWD)
The title of the world’s strongest currency belongs to the Kuwaiti Dinar.
Also located on the Persian Gulf, Kuwait receives over 80% of its global revenue from the oil industry. Many of these sells take place with the U.S., giving Kuwaiti and the other top three currencies on this list large reserves of U.S. Dollars to back their own currencies.
The Kuwait Dinar is not widely available for currency trading and even if it was, the stability of the currency makes trading the instrument a low-yield investment when factoring in fees and commissions.
The Kuwait Dinar was previously pegged to the U. S. Dollar. Since 2007 it has been pegged to an undisclosed group of currencies managed by the Kuwaiti Currency Board.
Did you know the global foreign exchange market is the largest traded market in the world? Learn more about what is forex how you can trade around the ever changing strength of various currencies. Already a trader? Open afree demo accountwith FOREX.com to practice trading the forex market.
