Because of Brexit, the pound – i.e., British currency – has just plunged to a thirty-year low against the dollar. The euro has also fallen to a low against the dollar. The Japanese yen’s value has also gone up in value in comparison to the pound. But what does that mean for you – if you haven’t invested in currency? And what does it mean for a currency to be strong or weak? It might affect you more than you think.
Check out our investment calculator.
What Makes a Currency Strong or Weak?
A currency is classified as strong when it is worth more than another country’s currency – in other words, if the American dollar was worth half a pound, the pound would be considerably stronger than the dollar. That means that the American dollar would be considerably weaker than the pound.
It also means that it would be easier for someone from England to afford a vacation in America than it would be for someone from America to afford a vacation in England. It also means that products from England would cost more for an American, and products from America would cost less in England.
Planning a vacation? Check out which credit card will be best for your travels.
Some countries have very strong currencies when the world economy is weak or politically unstable. These countries are called “safe havens” because that country is viewed as economically and politically stable. In other words, their currency is likely to recover from any turmoil going on. The U.S. is viewed as a “safe haven,” so the dollar tends to get stronger in times of instability.
Benefits of a Strong Currency
It might seem like you would want your country’s currency to be the strongest. When your country’s currency is very strong, imported goods are cheaper and it’s easier for you to take a vacation in a foreign country.
You’ll have more disposable income and are more likely to be able to take that vacation you always dreamed of. But it’s not quite that simple.
Related Article: Top 5 Ways to Dodge Expensive Fees on Summer Travel
Benefits of a Weak Currency
Some countries keep their currencies weak on purpose. Why would they do that, if they could get all of the benefits described above?
Well, if it’s cheaper for your country to import goods – because its currency is stronger than another country – that makes it more expensive for the other country to import goods.
In addition, people might buy imported goods instead of domestically produced goods in order to save money. When your currency is weaker, more people want to buy your country’s goods, which means that there will be more demand, which means that there will be more jobs.
The Bottom Line
A strong currency is good for people who like to travel abroad, and people who like imported products, because those will be cheaper. However, it can be bad for domestic companies.
When currency is weak, that can be really good for jobs, but it’s bad for people who want to travel abroad or use imported products. And with the world getting more and more global, more and more products are imported, so that affects people’s disposable income. Ideally, it’s important to maintain a balance.
Update: Have more financial questions? SmartAsset can help. So many people reached out to us looking for tax and long-term financial planning help, we started our own matching service to help you find a financial advisor. The SmartAdvisor matching tool can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to up to three registered investment advisors who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
Photo credit: ©iStock.com/andresr, ©iStock.com/Eva Katalin Kondoros, ©iStock.com/danchooalex