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Originally Posted by slang
What exactly determines the strength of a given country's currency?
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Assuming the currency value is permitted to run free (which is not the case in Hong Kong, Argentina, Iraq, and some other economies), then the currency value is how an economy is rewarded for strong economic parameters AND punished for doing bad things such as money games.
For example, if the government prints too much money, runs excessive deficiets, issues lots of bonds today to make the economy look prosperous, etc, then the currency markets (eventually) punish that economy by lowering currency value.
If the economy shows fiscal restraint, increases productivity (innovates with the products and not with the finance), etc, then world markets upgrade the currency value.
Political types may make the economy look good today by issuing tax cuts, spending money by running up government and trade deficiets, selling Treasury bonds to other nations, etc. This can make the economy look good for those few years. But then the currency markets reap their revenge many years later by devaluing the currency. There is no free money. If the economy does not practice responsible financial activity, then the currency markets take revenge.
IOW the economy gets punished because suddenly the people's standards of living are sharply devalued along with the money. IOW the inflationary pressures that were always there, but were masked by government money games, are then released as world currency markets punish by lowering the currency value.
What example would you prefer to better understand these principles?