Answer to Question #43182 in Other Economics for Leeann Star

Question #43182
What are the key economic factors that keep a country's currency strong? For instance; why is the usd strong when the usa has so much debt? Why is the Vietnamese dong so weak? Kuwait only has 38 billion in debt so I might understand it's value. In 1980-1983 IMPORT percentages were: USA 9.5% Vietnam 0% Kuwait ranged from 34-52% and Iraq 0% Their EXPORT percentages were: USA 9% Vietnam 0% Kuwait 55-78% and Iraq 0% The currency was worth from 1980-83 USA I have to keep at a dollar and compare other countries to the dollar. Vietnam 20 dong= 1usd Kuwait 3.46 Iraq 3.22 2009-2013 IMPORTS USA 16% Vietnam 78.5% Kuwait 26.5% Iraq 33.75 Kuwait'debt is only 38 billion I think EXPORTS: USA 12.75% Vietnam 73.5% Kuwait 66% Iraq 41.5% Currency Vietnam 21,000 avg Kuwait avg 3.5 and Iraq 1170 avg
Expert's answer
Sometimes, we judge economic success from only a very limited standpoint,ignoring much more important factors. One example, is judging the desirability of an economic policy from the strength of a currency. When you have a large current account deficit, when your economy is in recession, a depreciation is exactly what the economy needs. Having a strong currency, when economic fundamentals don’t support that level just creates further economic misery.

One obvious example that springs to mind is the effort in 1992 to keep the Pound artificially overvalued within the ERM. To keep the Pound at a set level against the D-Mark, we put up interest rates to 15% and caused a severe recession. The strong pound was completely unsuitable for the UK economy, but we persisted with the policy because of a mistaken belief that keeping a
‘strong’ pound was ‘good’.

Another classic mistake was the decision in1925 to rejoin the gold standard at a level that was unsuitable for the post-war UK economy. The consequence of this decision was deflation, low growth and a rising debt to GDP ratio. In this case, the strong pound was damaging to the UK economy.

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