What Is a Weak Currency?
A weak currency refers to a nation's money that has seen its value decrease in comparison toother currencies. Weak currencies are often thought to be those of nations with poor economic fundamentals or systems of governance. A weak currency may also be encouraged by a country seeking to boost its exports in global markets.
Currencies weaken and strengthen against each other for a variety of reasons but economic fundamentals do play a primary role.
Key Takeaways
- There can be many contributing factors to a weak currency but a nation's economic fundamentals are usually the primary reason.
- Export-dependent nations may actively encourage a weak currency in order to boost their exports.
- Currencies can also be weakened by domestic and international interventions.
- Currency weakness or strength can be self-correcting in some cases.
Understanding a Weak Currency
Fundamentally weak currencies often share some common traits. They can include a high rate of inflation, chronic current account and budget deficits, and sluggish economic growth.
Nations with weak currencies may also have much higher levels of imports compared toexports, resulting in more supply than demand for such currencies on international foreign exchange markets if they're freely traded.
A temporary weak phase in a major currency provides a pricing advantage to its exporters but this advantage can be wiped out by other systematic issues.
Examples of Weak Currencies
Currencies can also be weakened by domestic and international interventions. China's devaluation of the yuan in 2015 followed a long period of strengthening. The imposition of sanctions can have an immediate effect on a country's currency. Sanctions weakened the Russian ruble in 2018 but the real hit came in 2014 when oil prices collapsed and the annexation of Crimea set other nations on edge when dealing with Russia in business and politics.
Perhaps the most interesting example is the fate of the British Pound as Brexit neared. The British pound (GBP) was a stable currency but the vote to leave the European Union set the pound on a very volatile path that saw it weaken in general as the process of leaving plodded along.
Supply and Demand in Weak Currencies
Like most assets, a currency is ruled by supply and demand. When the demand for something goes up so does the price. The price of the yen goes up and the yen becomes a strong currency if most people convert their currencies into yen. More dollars are needed to buy the same amount of yen so the dollar becomes a weak currency.
Currency is a type of commodity. An individual is selling their dollars and buying yen when they exchange dollars for yen. A currency's value often fluctuates so a weak currency means more or fewer items may be bought at any given time. The dollar is a weakening currency when an investor needs $100 to purchase a gold coin one day and $110 to purchase the same coin the next day.
Pros and Cons of a Weak Currency
A weak currency may help a country's exports gain market share when its goods are less expensive compared to goods priced in stronger currencies. The increase in sales may boost economic growth and jobs while increasing profits for companies that are conducting business in foreign markets.
American exports tend to increase when purchasing American-made items becomes less expensive than buying from other countries. In contrast, exporters face greater challenges selling American-made products overseas when the value of a dollar strengthens against other currencies.
How Does a Budget Deficit Work?
A budget deficit occurs when a government spends more money than it collects. This can be the result of an ailing economy, a recession, or high unemployment rates. The government collects less in taxes when citizens are working and earning less.
Why Did China Devalue Its Currency?
China's economy was believed to have been ailing just before it devalued its currency in 2015. The move was said to have been made to revitalize the country's exports. China's economy was heavily dependent on exports at that time. The decrease was made against the U.S. dollar.
How Strong Is the U.S. Dollar?
The strength of the U.S. dollar rose to a 20-year high in 2022 but it had weakened by the end of August 2023. It was weaker than both the British pound and the euro at that time.
The Bottom Line
Currency strength or weakness can be self-correcting. More of a weak currency is needed when buying the same amount of goods priced in a stronger currency. Inflation will climb as nations import goods from countries with stronger currencies. The currency discount may eventually spur more exports and improve the domestic economy if no systematic issues are weakening the currency.
In contrast, low economic growth may result in deflation and become a bigger risk for some countries. Consumers may postpone spending and businesses may delay investing when they begin expecting regular price declines. A self-perpetuating cycle of slowing economic activity begins and this will eventually impact the economic fundamentals supporting the stronger currency.
FAQs
A weakening dollar implies several consequences, but not all of them are negative. A weakening dollar means that imports become more expensive, but it also means that exports are more attractive to consumers in other countries outside the U.S. Conversely a strengthening dollar is bad for exports, but good for imports.
What is an example of a weakening currency? ›
A currency's value often fluctuates so a weak currency means more or fewer items may be bought at any given time. The dollar is a weakening currency when an investor needs $100 to purchase a gold coin one day and $110 to purchase the same coin the next day.
Is a weak dollar good or bad? ›
A weak dollar is not necessarily bad, nor is a strong dollar necessarily good. A weak dollar makes imported goods more expensive for American consumers to buy, but it makes American goods a relative bargain abroad.
What are the pros and cons of a strong dollar? ›
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.
Who benefits from a weak dollar? ›
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.
What are the benefits of a weaker currency? ›
Currency devaluations can be used by countries to achieve economic policy. Having a weaker currency relative to the rest of the world can help boost exports, shrink trade deficits, and reduce the cost of interest payments on outstanding government debts.
What are the pros and cons of fixed exchange rates? ›
Fixed currency exchange rates pros vs. cons
| Fixed Pros | Fixed Cons |
|---|
| Enable the currency's value to remain stable | Central bank must intervene often |
| Can help lower inflation which encourages investment | Country loses monetary independence |
| The Central Bank has the power to maintain rate | Can be expensive to maintain |
A weakening dollar implies several consequences, but not all of them are negative. A weakening dollar means that imports become more expensive, but it also means that exports are more attractive to consumers in other countries outside the U.S. Conversely a strengthening dollar is bad for exports, but good for imports.
What is one advantage of a weak dollar? ›
A weaker dollar also makes U.S. goods and services (and assets) relatively less expensive for foreign buyers, which benefits U.S. producers that export goods.
What is the weakest currency in the world? ›
What Is the Weakest Currency in the World? 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.
Disadvantages of Currency Depreciation:
- Costly debt rates. For an individual with debts outside the country, there is an additional cost on their debt repayment impacted by the currency depreciation.
- Imported Goods Cost More. ...
- Reduced investments. ...
- Increases in Inflation.
Besides hurting earnings, a super-strong dollar can also hurt prices of US stocks and bonds by making them more expensive for big non-US institutional investors.
What makes a currency strong or weak? ›
A currency's strength is determined by the interaction of a variety of local and international factors such as the demand and supply in the foreign exchange markets; the interest rates of the central bank; the inflation and growth in the domestic economy; and the country's balance of trade.
What are the cons of a weak dollar? ›
On the downside, a weak dollar means foreign products and services are more expensive to U.S. consumers. To the extent such products continue to be purchased, the cost of living will rise, which in turn will affect consumer choices.
Is a weak dollar good for gold? ›
All else being equal, a stronger U.S. dollar tends to keep the price of gold lower and more controlled, while a weaker U.S. dollar is likely to drive the price of gold higher through increasing demand (because more gold can be purchased when the dollar is weaker).
What causes a weak dollar? ›
Currency depreciation, in the context of the U.S. dollar, refers to the decline in value of the dollar relative to another currency. Easy monetary policy by the Fed can weaken the dollar when investment capital flees the U.S. as investors search elsewhere for higher yield.
What is an example of a strong and weak currency? ›
This means, in general, that a Swiss franc is stronger than a US dollar and a Canadian dollar is weaker than a US dollar. Example: If a cup of coffee in the US costs 3 USD, it would require only 2.61 CHF but 4.02 CAD to purchase that cup of coffee.
What is the current weak currency? ›
What Is the Weakest Currency in the World? 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.
What happens when a currency is too weak? ›
A devalued currency can result in "imported" inflation for countries that are substantial importers. A sudden 20% decline in the domestic currency could result in imports costing 25% more, as a 20% decline means a 25% increase is needed to get back to the original price point.
How to tell if a currency is stronger or weaker? ›
A currency's strength is determined by the interaction of a variety of local and international factors such as the demand and supply in the foreign exchange markets; the interest rates of the central bank; the inflation and growth in the domestic economy; and the country's balance of trade.
