What is the strongest currency in the world?

The strongest currency in the world is difficult to quantify. It can mean:

• Which currency is best at holding its own against the mighty US dollar?
• Which currency offers the most stability?
• Which currency can withstand financial turmoil most effectively?

In a time of major upheaval in the global economy, many investors will be looking for safe places to store their capital. Here, we’re going to give you a list of the strongest currencies in the world across the three categories identified above.

The strongest currency in the world today

Generally speaking, the US dollar is regarded as the strongest currency in the world on multiple fronts. It’s also the most powerful currency.

Several factors, and a lot of history, are behind this. By and large, the US offers plenty of stability when it comes to economic policies and political climate. A sizeable proportion of foreign bank reserves have been denominated in dollars. Bonds from the US Treasury – a form of government debt – are seen as trustworthy because the country has a reputation for paying them back in full and on time. The dollar is also relied upon as a means of exchange around the world, including in parts of Russia and Latin America.

Countries with the strongest currencies have to deal with some pros and cons. A strong dollar means that you get more pounds and euros for your money. Because of this, importing goods from the UK and the EU becomes much cheaper for US businesses and consumers – and holidays abroad are far more affordable.

It isn’t all good news for those living in the States, though. Having the strongest currency in the world can mean that it’s simply too expensive for international tourists to pay a visit, which is bad news for the tourist industry. It’s also tough for US businesses that are hoping to export their products around the world because a strong dollar makes their items relatively expensive. That’s why some countries use deliberate measures to keep their currencies weak.

Here’s an example to illustrate the problem. Kevin and Amanda are British and they want to go on holiday to the US for two weeks. They book a trip a week in advance when £1 is worth $1.42. By the time the holiday starts, however, £1 is worth just $1.16. This means that for every £100 they exchange, they’re getting $28 less. If they have a budget of £5,000 for their holiday, they now have $1,400 less spending money. Ouch.

The second strongest currency in the world is the euro. We’re basing this on two main factors. Approximately 21% of foreign bank reserves are denominated in euros – the next biggest currency after the dollar, which accounts for 59%. The other metric comes in terms of trading volumes on the forex markets. Figures from 2019 show the dollar has a daily market share of 88%, with the euro on 32%. The Japanese yen and the British pound sterling were in third and fourth place respectively.

Most valuable currency in the world

This is difficult to quantify. It partly depends on how cheaply goods and services can be purchased in the territories where the currency is used. A good barometer, however, can be its appreciation against the US dollar, which is widely regarded as the world’s reserve currency.

In September 2021, Bloomberg analysis showed that the South African rand had become the best-performing, emerging market currency, appreciating 4.2% against the dollar since the start of the year.

Currency valuations have been thrown into disarray in recent times by the Covid-19 pandemic – which continues to challenge economies across the planet. The health crisis has altered the list of the strongest currencies in the world. Why? Because money is now flowing out of emerging economies and back into dollars as investors seek safety. As a result, the dollar’s value has strengthened in line with this strong demand.

Just look at how the dollar has soared against the pound. Back in 2007/08, you could buy $2 for every pound in your wallet. Sterling has suffered plenty of body blows as a result of the Covid-19 crisis and Britain’s decision to leave the European Union. The uncertainty surrounding Covid-19 took the pound down to just $1.16 in March 2020 – lows that haven’t been seen for 35 years. At one point, analysts were wondering whether the pound would achieve parity with the greenback, meaning that £1 would be equivalent to $1. The UK currency has since recovered some stability, however.

The Australian dollar and the South Korean won have fared significantly better against the US dollar than the pound.

Unsurprisingly, the US Federal Reserve is nervous about maintaining its reputation for being the strongest currency in the world. But a high demand for dollars creates a lot of headaches for American businesses that operate internationally. Earnings generated overseas in pounds and euros seem weaker when converted into dollars in a company’s accounts – making it look like that firm has generated less revenue and profit.

For the foreseeable future, it’s worth keeping an eye on the US Dollar Index. This measures the value of the dollar against a series of currencies that are usually traded against the greenback. After reaching 52-week highs in March 2020, the index fell below the 100 base level in May 2020. (Anything over 100 means that the dollar is appreciating against other currencies.) At the time of writing, it was flirting with the mid-90s, after dipping close to 90 in March. Inflation and interest rate worries have translated into volatility for the greenback.

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