Having a Strong Currency Like a Hot Pot
Having a strong currency can prove a challenge for the state and their policy makers. Besides having benefits, a strong currency also makes the country’s goods and services more expensive than those denominated in cheaper currencies. Because such situations create winners and losers, having a strong currency can easily provoke controversial situations that are difficult for policy makers to do.
EXPORT AND STRONG CURRENCY
If a country has a strong currency, consumers can buy goods or services in foreign currency at a cheaper price. However, as a national currency related to other currencies, exports can suffer because they become more expensive for foreign buyers. Exports represent foreign currency flows into a country, so reducing them can create bad economic conditions significantly.
CENTRAL BANK CURRENCY POLICY
One of the main variables that can influence the value of a currency is the central bank’s policy, and when the financial institution chooses to use different policies it can easily provoke fluctuations in currency exchange rates.
In the years after the 2007-2009 financial crisis , various central banks utilized aggressive monetary policy in an effort to encourage stronger expansion. The financial institution cut its benchmark interest rate to record lows and buy assets worth trillions of dollars.
The Federal Reserve cut interest rates near all-time lows and used three separate bond purchase programs with the latter closed in October 2014. The Fed removed its quantitative easing (QE) before other countries’ central banks, as the US grew faster than other developing countries.
One financial institution that purchases bonds after the Fed stops this transaction is the Bank of Japan (BOJ). On July 2016, the BOJ announced that it would not only continue to buy fixed income securities but also increase purchases of trading funds from 3.3 trillion yen to 6 trillion yen. Market participants respond by pushing the yen higher relative to other major currencies.A development that makes Japanese policymakers unhappy and has the potential to damage the attractiveness of the country’s exports.
Many central banks followed the BOJ’s announcement and took steps to create a more aggressive monetary policy. The Reserve Bank of Australia (RBA) for example, cut its benchmark interest rate to a record low of 1.5% in August 2016.Time for a policy meeting in which the move was decided to state that “there is a reasonable possibility for further stimulus by a number of major central banks” and suggested that the RBA make this policy move primarily with the aim of taking steps to fend off the increase for the Australian dollar.
The Bank of England (BOE) also announced changes in monetary policy in August 2016 which stated that it wanted to help reduce the pressure that the economy would face in addition to Brexit. As a result, the BOE increased QE, lowered interest rates and disbursed £ 100 billion to help improve loans.
Having a strong currency can create a difficult situation for both countries and their policy makers. This situation can create a whirlwind of the economy by reducing the attractiveness of a country’s exports. This challenge can prove even more dangerous when the economy weakens. In this case, many countries hate having a strong currency.