Weak Currency (Economics) - Explained
What is a Weak Currency?
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Table of ContentsWhat is a Weak Currency?Why is a Weak Currency Important? Examples of Weak CurrenciesSupply and Demand Rule Weak CurrenciesPros and Cons of a Weak CurrencyAcademic Research for Weak Currency
What is a Weak Currency?
A nations currency that has a value depreciation while other currencies are experiencing value appreciation is a weka currency. When decrease in value is particular to one currency when compared to other currencies, the currency is said to be weak. There are some factors responsible for weak currency but the major one is the poor economic strength of a nation. While a country with a healthy economy is said to have a strong currency, weak currency is an attribute of a frail economy. Below are major points to note about a weak currency;
- A weak currency reflects a decrease in the value of a nation's currency when compared to other currencies.
- Poor economic structure or frail economies give rise to weak currencies.
- Exports become cheaper when the currency of a nation is weak.
- A previously weak currency can regain strength without any external force influencing it.
Why is a Weak Currency Important?
There are ways to gauge the strength of a currency to determine whether it is weak or strong. Generally, weak currencies are attributed to weak economies, it is impossible for a country with a robust economy to have a weak currency, that will be an irony. Weakness in the currency of a nation can trigger inflation, retarded economic growth and deficits in the country. Also, nations with weak currencies often experience cheaper exports as compared to imports.
Examples of Weak Currencies
Quite a number of nations have experienced weak currencies at one time or the other. Weak currency was experienced in China in 2015, this was deliberately injected. The government made intervention that weakened the Chinas currency after a long period of enjoying strong currency. Aside from government interventions, both domestically and internationally, monetary sanctions is another factor that can affect the strength of a countrys currency. An instance was the Russian currency that became weak in 2014 due to sanctions.
Supply and Demand Rule Weak Currencies
The strength of a currency is greatly affected by market forces, such as supply and demand. This effect can either be negative or positive, that is, demand and supply can weaken the currency and at the same time strengthen the currency. Increase in demand translate to increase in the price of goods. For example, if many buyers have to convert their currency to Japanes yen before purchasing a set of goods, if the value of yen increases, the value of other currencies might decrease, this means yen is a strong currency while some other currencies like dollar will become weak and vice versa.
Pros and Cons of a Weak Currency
A country that is vested in exports can benefit significantly from a decrease in the value of a currency. When the currency is weak, it means that exports will be cheaper compared to imports. In this situation, weak currency has benefit, as exports increase in their sales, they recruit more labour and expand their businesses. Weak currencies often result in inflation in the country, more currencies are needed to purchase goods because the value of the currency has declined. A country with a weak currency and does more of imports than exports will experience a spike in inflation. The strength of a currency can return to normal on its own accord, this characteristic of currency is known as self correcting. The strength of a currency can be self-correcting while in some cases, it takes certain policies and measures to correct it.
- Exchange Rate
- Equation of Exchange (Economics)
- Real Effective Exchange Rate (REER)
- Limited Flexibility Exchange Rate System