What Makes Currencies Weaker &/OR Stronger? What Are The Major Factors Affecting A Currency's Value? (#12)

What Makes Currencies Weaker or Stronger? Major Factors Affecting a Currency's Value

Currencies of different countries hold different values relative to one another. As of mid-2026, for example:

• $1 (USD) ≈ ₹95.7
• €1 (EUR) ≈ ₹110
• £1 (GBP) ≈ ₹130
• C$1 (CAD) ≈ ₹68.7

(Exchange rates shift daily — treat these as a rough snapshot rather than a fixed reference point.)

Ever wondered why currencies are valued so differently — or what would happen if they all became equal overnight? Let's dig into both questions.

What Makes Currencies Weaker or Stronger?

There are several major factors that determine a currency's value. Let's walk through them.

Demand & Supply

This is the core factor behind the price of anything that isn't fixed — shares, currencies, and similar assets. When demand for something rises faster than its supply, its price rises. When supply outpaces demand, price falls. Currencies follow the same principle.

A quick primer: Export = selling to other countries. Import = buying from other countries.

Example: India imports the large majority of its crude oil — as of FY26, roughly 88–90% of India's crude oil consumption comes from imports (from countries including Russia, Iraq, Saudi Arabia, and the U.S.), with only a small fraction produced domestically.

→ Related: What Are Commodity Investments?(#9) — crude oil is one of the commodities discussed there.

To buy oil from the U.S., India has to convert INR (₹) into USD ($) — heading to the foreign exchange market and creating demand for dollars. That demand for USD (and corresponding willingness to give up INR) is part of what keeps the dollar strong relative to the rupee.

Importing & Exporting

How much a country imports versus exports has a direct impact on its currency's value. Continuing the example above: because the U.S. produces enough oil to export to India (and gets paid in USD for it), that steady demand for dollars supports the dollar's value.

More broadly, the more a country produces and exports, the more it can sell internationally — which tends to benefit both its currency and its overall economy.

Speculation

The Forex Market — where investors trade currencies against one another, much like the share market trades company shares — plays a major role in short-term currency value swings.

Investors typically buy into a currency they expect to appreciate, and that demand itself pushes the price up. Conversely, a currency few people want to hold tends to weaken. It's the same demand-and-supply principle at work, just applied to currencies specifically.

Foreign Reserves & Trade Relationships

Consider the Kuwaiti Dinar — historically one of the most valuable currencies in the world, largely on the back of Kuwait's oil exports and the resulting economic stability that comes from being a major exporter of a globally essential commodity.

The U.S. dollar, meanwhile, remains the world's most traded currency for a related reason: the petrodollar system — an arrangement, dating back to the 1970s, under which Saudi Arabia (and other oil producers) agreed to price and sell oil in U.S. dollars, with the U.S. providing security guarantees in return. Because oil is priced in USD globally, most countries need dollars to buy it — which has meaningfully reinforced the dollar's dominance in global trade.

Other factors that affect a currency's value include:

• Economy — the U.S. continues to have one of the strongest and most influential economies globally.
• Inflation — high or unstable inflation erodes a currency's real value over time, even if its nominal exchange rate looks stable.
• Other countries' performance — strong-performing economies (high exports, high investor returns) tend to attract more currency demand than weaker ones, though investors weigh this against a country's inflation rate. If a currency offers a 4% annual return but inflation runs at 3%, the real return is closer to 1% — which is why inflation is always part of that calculation.
• Other factors — GDP, government policy, unemployment, and future growth outlook all play a role too.

→ Related: Who Decides the Price/Value of Shares in the Share Market?(#4) — the underlying demand/supply logic is strikingly similar.

What If All Currencies Became Equal? (What If $1 = ₹1?)

It's a fun thought experiment: if every currency were suddenly worth the same, international travel and spending would look drastically different overnight.

But in practice, this would likely cause serious disruption. A major reason many multinational companies (including large IT firms) operate in India is access to comparatively lower labor costs — a byproduct of the current exchange rate. If $1 = ₹1, that cost advantage disappears, and companies operating primarily for that reason would have far less incentive to stay, with real knock-on effects for employment.

Prices of goods would shift as well, even though the actual value of money hadn't fundamentally changed — only the numbers representing it. Wages would likely need to adjust too, since ₹40,000 would suddenly represent a very different amount of purchasing power than it does today. In practice, market forces (like inflation, or a natural re-adjustment of the currency's value) would likely pull things back toward some new equilibrium relatively quickly — a truly equal $1 = ₹1 isn't a stable state that persists in the real world.

Is Having a Weaker Currency Good for a Country?

There's no single right answer — it depends on whether a country is export-driven or import-driven.

Export-driven economies — countries that manufacture and sell a lot of goods abroad — generally prefer a weaker currency. A weaker currency makes their exports cheaper for foreign buyers, which drives more demand for their goods internationally.

Import-driven economies — countries that rely more heavily on buying goods from abroad — generally prefer a stronger currency, since it lets them purchase foreign goods more cheaply.

Exchange Rates & Their Types

The conversion rate between two currencies is known as the exchange rate. There are two main types:

• Fixed Exchange Rate — a country's government sets and controls its currency's value directly.
• Floating/Flexible Exchange Rate — a currency's value is determined by market factors and fluctuates continuously. Most major currencies operate this way today.

Depreciation vs. Devaluation

• Depreciation: when a currency's value falls due to market forces, under a floating exchange rate system.
• Devaluation: when a currency's value is deliberately lowered by the government itself, under a fixed exchange rate system.

Related concepts, but not interchangeable — the key difference is who (or what) is driving the decrease.

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That covers the core factors behind currency valuation. Is there anything you think I missed, or another related topic you'd like covered? Let me know in the comments.