You may be familiar with currency exchanges—exchanges where people trade one currency for another similar to how stocks are traded on the New York Stock Exchange.
If so, you’re probably not surprised to know that currencies fluctuate in relation to their value with one another, which is how some people make a living trading currencies.
Given this, it probably doesn’t surprise you to know that some currencies are volatile, fluctuating greatly in their value, whereas others are relatively stable. How do you know which is which? Well, in this video, we’ll discover what makes a currency stable and which currencies are the most stable.
What is a Stable Currency?
A currency is said to be stable when it maintains its purchasing power and unit of account over a long period of time. In other words, it’s a currency that will continue to be worth the same a year from now as it is today.
Contrast this with an unstable currency, which will experience large fluctuations in value. A stable currency will have smaller fluctuations in its exchange rate than an unstable currency.
Stable currency vs. Strong currencies
Another term you might hear in reference to currencies is ‘strong’ currency. This is a related concept, though it is different.
Stability refers to how a currency retains its value over time; strength measures how much a currency is worth now. A strong currency can purchase more of other currencies, which makes imports cheaper and exports more expensive.
Though both are generally associated with robust economies, it is possible for a strong currency to be unstable and vice versa. Strength generally refers to a relative position at a certain point in time.
For example, if we say the dollar is strong compared to the yen, it means that a single dollar can buy more yen than it usually could. Likewise, a weak dollar would buy fewer yen.
Thus, an unstable currency would fluctuate between being strong and weak more commonly than a stable one, whereas a stable currency maintains its strength over time.
What Makes a Currency Stable?
A currency’s stability is influenced by many variables, including the strength of the economy (in particular, the size of a nation’s export industry), economic policies, and level of international recognition.
A robust economy with a strong export sector ensures that the currency is backed by tangible goods and services. This creates an incentive for others to desire the currency over time as there will be consistent demand for the currency as people seek it to buy the nation’s goods and services.
Economic policies that keep inflation low also help stabilize a currency’s value. Ensuring that the purchasing power of the currency remains consistent over time makes it dependable as a store of value and a safe-haven investment during times of economic turbulence.
Contrast this with a nation with high or inconsistent inflation, which will see large changes in the demand for its currency as its purchasing power changes.
Finally, political stability and economic acceptance of the currency help to aid its stability. Since widely adopted currencies hold their value better than less widely used ones, global adoption of the currency helps aid its stability.
The best example of this is the US dollar which is used as a reserve currency and legal tender in multiple countries. Additionally, some countries attract foreign investment through economic policies such as favorable interest rates, aiding the stability of their currency by creating demand.
Ultimately, a stable economic and political structure helps keep a currency stable by ensuring its dependability. Economic policies ensure that the value of the currency and its purchasing power remain constant.
Political stability helps because it allows potential investors to be confident that the currency will remain in use with no major shockwaves caused by political upheaval.
The Most Stable Currency: The Swiss Franc
The Swiss franc, supported by the renowned Swiss banking system, has shown itself to be resilient in times of economic upheaval. Throughout good times and bad, its value versus other currencies has remained constant.
Thus, the Swiss franc has become recognized as the most stable in the world and a safe-haven asset for the world’s investors.
You may recall that we talked about political stability playing into the stability of a nation’s currency. What is Switzerland most famous for (other than pocket knives, watches, and chocolate)? Its neutrality.
Staying out of the fray has allowed people to retain confidence in the franc’s ability to avoid the turbulence that often engulfs other currencies during times of political unrest.
Additionally, Switzerland has a strong economy and a highly developed banking system aiding in its currency’s stability. It has a low level of public debt and one of the highest per capita GDPs in the world.
This robust economy also has a strong export sector, helping keep its currency stable. Finally, even as inflation hit a 29-year high in 2022, it only rose to 3.5%, much lower than economies such as the US, EU, and UK at this time.
The US Dollar and Other Honorable Mentions
The US dollar also has wide recognition as being the strongest and most stable. In fact, up until 1971, the US dollar was backed by gold, and other currencies were fixed to the US dollar. It’s difficult to get more stable than that.
Even after the abandonment of the gold standard, the US dollar is the most widely used currency in the world. Many countries outside the US, including Ecuador, El Salvador, Marshall Islands, and Panama use the dollar as either their official or de facto currency, and it still serves as reserve currency throughout the world.
It is the most widely used and accepted currency in the world and has been used in international trade since 1792 (more widely since World War II).
Still, it is not without its problems. The US has a huge national debt of $31.7 trillion as of April 28, 2023. It continues to grow, even as the debt outpaces the nation’s GDP—last year, the US national debt was 129% of the US’s GDP.
Additionally, the past few years have seen a rising inflation rate, though policies undertaken by the Federal Reserve have helped stabilize the dollar by reining in increasing prices.
Its longevity, strong economy, and status as a reserve currency help make the US dollar a stable currency.
Other global currencies known for their stability include:
- Japanese yen
- Australian dollar
- British pound sterling
- Norwegian krone
- Canadian dollar
- Euro
- Danish krone
- Singapore dollar
Conclusion
Many factors affect a currency’s stability, making it difficult to rank them objectively. Which currency ranks highest may depend on which factors are most important to the individual or how you balance the advantages and disadvantages of each.
Furthermore, the economies of numerous countries are constantly undergoing rapid changes, and these can cause dramatic changes year to year if not day to day.
In this article, we’ve provided a look at the factors that make a currency stable and looked deeper into two of the currencies that are widely recognized by experts as being the most stable.
Though the situation can change quickly, both the Swiss franc and the US dollar (as well as the other currencies mentioned) have withstood the test of time. As such, they provide a relatively safe store of value compared to other potentially more volatile currencies.
We hope you enjoyed this article and encourage you to check out other articles in our series of financial topics. Thank you for joining us. We hope you enjoyed this article, found it informative, and that you will join us again.
