Can somebody explain foreign exchange rate to this simpleton?

Chew Toy McCoy

Site Champ
Aug 15, 2020
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I've been lead to believe that the US dollar is the most valuable and powerful currency on earth, crushing all others, but when I go online and a currency defaults to euros or pounds the number amount in dollars is always noticeably higher. For example I'm looking right now at something that is 29.35 in spliced L backwards 3 symbol thingy which in US dollars comes to 39.00. Using basic math 39.00 is more than 29.35, by like a lot. For that reason I feel my dollar is decidedly less powerful. Can somebody please explain that?

Thanks for your time.
 

niji

Active member
Aug 29, 2020
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hokkaido
hi

myself not being very good in math, i hesitate to reply. but anyway, i do.

here is the way that i approach currency rates, and their meaning to us.

lets use this fictional example:
a country where the current exchange rate of USD to XYZ's currency is 1 USD to 2 XYZ.

its not meaningful to just think of it in terms of needing 1 unit of USD to being equal to 2 units of XYZ.

for USD persons, in the end, its what 1 USD (at any given exchange rate ) can buy in country XYZ.

if the combination of 1 USD@2XYZ can buy a bottle of nice wine, then that might be an indication that the dollar is strong against that currency.
but not necessarily.
maybe good wine in that country is just really inexpensive.
maybe a CNY (Chinese Yuan) against that country only needs the equivalent of only .5USD to buy the same bottle of good wine.

so, purchasing power of USD expressed in a country's equivalent currency is a way to estimate if the USD in strong against that currency.
but that's not always to figure out easily.

so: another way to know if a currency is strong against another currency, the way i myself use, is to look at a graph of the exchange rate over time.

lets look at the USD versus the India Rupee, over the last 10 years.

Screen Shot 2020-09-07 at 08.33.50.png


according to this apple Stocks graph data (which is super easy to use for currencies as well), the USD has gotten extremely stronger against the INR over this 10 year period.
10 years ago 1 USD could only buy around 40+ INR. Now 1 USD can buy around 73+ INR

the complicating factor in the above is that this simple graph doesnt (can't) account for price of goods inflation within India.

but looking at a currency versus another currency over time, is one of the best ways to be able to say: the USD has gotten stronger (or weaker) against X. but it doesnt indicate the full story.

so, in then end, you need to be able to know prices of goods and services within a country (first and foremost) and then also see the exchange rate over time, in order to be able to really know if a currency is strong or not against another currency.

lastly: lets use this example of a person seeing something on a UK web site that s/he can purchase on line and have delivered to her/his home in the USA.
this kind of "buy-not buy decision" is very easy to do.
a certain model of a Marantz amp bought on line within the USA might cost USD 500.
the exact Marantz amp in the UK might have a price in euro or GBP that is equivalent to USD 1000.
is the USD weak against the GBP?
that question is not the right question to ask in such a situation.
this is a simple "buy-not buy decision" and is the only question that can be answered.
it doesnt involve currency strength.
 
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Scepticalscribe

Moderator
Staff member
Aug 12, 2020
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I've been lead to believe that the US dollar is the most valuable and powerful currency on earth, crushing all others, but when I go online and a currency defaults to euros or pounds the number amount in dollars is always noticeably higher. For example I'm looking right now at something that is 29.35 in spliced L backwards 3 symbol thingy which in US dollars comes to 39.00. Using basic math 39.00 is more than 29.35, by like a lot. For that reason I feel my dollar is decidedly less powerful. Can somebody please explain that?

Thanks for your time.
"Most valuable and powerful currency on Earth"?

@niji's post made some very good points, but I wish to explore this from a wider political perspective.

A currency's strength is also a measurement of the economic strength and political power of the country that issues it.

In the 19th century, and - roughly - until the second world war, Sterling occupied this role, as the UK was undoubtedly the richest, and most powerful, country on the planet.

However, since then, firstly, the imperial (and political and economic) decline of the UK, their decline in manufacturing output, and, secondly, the fact that no other European power combined both political and economic power - Germany was considered "an economic giant but a political pygmy" in the decades immediately succeeding WW2 - meant that the UK was no longer able to hold this position, and no other country in Europe (France also declined as an imperial power, and, while Germany - Eest Germany at the time - was powerful economically, this was not matched in projection of political power, for very sound historical reasons) was able to replace it.

But, the United States - which was a manufacturing giant at the time, and largely unscathed by WW2 - emerged as the ranking global power by the end of WW2; it was inevitable that its currency would reflect its global strength and influence, and increasingly come to be seen (and used) as a default global reserve currency, a process further accelerated by the decision to denominate oil and petrol sales in dollars in the early 1970s.

Since the Brexit referendum in 2016, for example, the value of Sterling has declined still further (the currency has lost roughly a quarter of its value since 2016).

The measure of "power" is not how many dollars you need in order to buy some sterling or Euros, - for that particular exchange rate changes over time, and, while it offers a measure of comparative value, and purchasing power, and accurately reflects trajectories - declining or increasing power - it doesn't necessarily measure true political power.

For example, around the time of the second world war, it took almost four dollars to purchase one pound sterling, when I was a chid, it was closer to three, (which meant that sterling was depreciating), and now, today, one pound sterling equals, or will purchase, $1.30.

That tells me that the value of Sterling has declined (and continues to decline) relative to the dollar, - which accurately reflects the relative political strength of the two countries relative to one another, but this doesn't measure the position of either of them in the context of a global economy, or political system.

However, by the 1970s, the Gold Standard (as a means of setting an international recognise standardised value on a currency) was largely abandoned, while an agreement between KSA (Saudi Arabia) and the US established the dollar as the denominated currency for setting oil prices and purchasing oil, thereby facilitating the introduction of the so-called "petrodollar," whereby everything to do with the purchase of, exchange of, trade of, oil was denominated in dollars.

It was this, more than anything else - as oil markets now traded in dollars - that led to the dollar becoming the world's leading "reserve currency".

But, nowadays, the dollar is not the world's only reserve currency, just the main one. Around 60% of all transactions worldwide (down from over 70% a decade ago) still take place in the dollar.

But, there are other currencies, notably the Euro, (between 20-25% of all global transactions are carried out in the Euro), which are also deemed global reserve currencies.

When I started working on international missions in the 1990s, we were always paid in dollars; since the introduction of the Euro, we have been paid in Euros.

Besides, in 2019, KSA threatened to move the pricing of oil off the dollar, which is not a serious threat for now, but the very fact that they felt able to even think of making such a threat is not just yet another example of the notorious and sometimes cruel impulsiveness of Crown Prince MBS, but also a signal of the relative decline in the power, authority, international reputation, political strength and economic heft, of the US over the past twenty years.

While, as of now, the US is still ranked as the No 1 economy in the world (by the World Bank, the UN, the IMF), the fact that the US is no longer a manufacturing giant (but has outsourced much of its industry in pursuit of shareholder profit), is busily undermining its allies, and its own strategic alliances (under Mr Trump), means that this leadership is increasingly coming under challenge.

Physically, - rather than on the trading floors of intentional exchanges - the technology of minting - issuing - the dollar means that the actual currency is a lot less secure than are some comparable currencies which incorporate security features that make counterfeiting them a lot harder.

Personally, I would be astounded if China did not make a bid for the Renmimi (RNB) to become a designated global reserve currency over the coming decades, for reserve currencies reflect the relative power (economic, political - both "hard" and "soft") of the countries that issue them.
 
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