Understanding the impact of currency strength

The strength of a currency is crucial in assessing a country's influence in both the global economy and international relations. Moreover, currency policies have become a major source of tension among governments in today's interconnected economy, sometimes even overshadowing trade policies. In wealthier nations, currency issues have sparked political debates both domestically and internationally.
Currency relations, both national and international, play a key role in the global economy, primarily shaped by government's exchange rate policies. To understand the international trading system, we must consider national trade policies. Similarly, analysing the international monetary system requires insight into national currency policies. This has prompted researchers to explore how governments approach their exchange rates, considering both economic and political influences in shaping currency policy.
Developing countries have had to make important choices about their exchange rates. Some have closely tied their currencies to the dollar, euro, or other major currencies, while others have allowed their currencies to float freely. Additionally, some countries have made currency management a key part of their economic plans. These choices have significantly influenced their economic outcomes. For instance, many East Asian countries, especially China, credit their remarkable economic growth partly to policies that keep their currencies weak to boost exports. Conversely, currency crises have frequently occurred in other developing regions, such as Mexico in 1994, Asia in 1997-98, Russia in 1998, Brazil in 1999, and Argentina and Turkey in 2001. These crises often resulted in serious economic, social, and political turmoil.
Currency politics highlight key aspects of a country's political economy. Those who create currency policies must consider how their choices affect nearly everyone in society. Exchange rate policy offers a clear view of a nation's political economy, especially in countries that are open to global markets. In these cases, currency policy significantly influences various economic activities and political choices. Discussions about exchange rate policy and the decisions made reveal a lot about the economy, society, and political systems. Currency politics show the significance of the public, the role of elections, the organisation of economic groups, the influence of specific interests, and how responsive political institutions are to different pressures, along with many other elements of a national political economy. In essence, exchange rate policy requires the government to make a straightforward choice: to fix the currency or let it float, to maintain a strong or weak currency. However, these seemingly simple choices are influenced by very complex structures, motivations, and pressures.
Currency fluctuations can significantly affect both the local and global economy. When the dollar is weak, investors might benefit by putting their money into foreign markets or U.S. companies that operate internationally. Since currency changes can pose a serious risk for those with substantial foreign exchange exposure, it is wise to consider using various hedging tools to manage this risk. If a currency is popular for any reason, its value compared to other currencies can go up. However, if it is less wanted like during a local economic slump; its value will drop compared to others. Sometimes, currencies change quickly, and the effects are felt globally. Here are a few examples:
The 1997 Asian Financial Crisis: The crisis began when the Thai baht lost value. This event caused major economic problems throughout Asia. Many countries saw their currencies drop sharply, which created a chain reaction that upset economies and financial markets around the world, showing how linked the global economy is.
The 2008 Global Financial Crisis: The fall of Lehman Brothers led to a major financial disaster, causing big changes in currency values. The U.S. dollar gained strength as investors looked for safe options, while many emerging market currencies dropped sharply. This crisis revealed weaknesses in global financial systems.
Brexit (2016): After the UK decided to leave the European Union, the British pound dropped significantly. This decline influenced global markets, as investors began to reevaluate the risks linked to other currencies and economies connected to the UK, highlighting how political events can greatly affect currency values.
The COVID-19: The pandemic-Induced Crisis in 2020 caused major economic uncertainty. The U.S. dollar rose sharply because it was viewed as a safe option, while many emerging market currencies dropped significantly due to money leaving those markets and lower demand for exports. The economic impact was different for each country, resulting in changes in political power.
The Russian Ruble and Sanctions (2014-2022): After Russia took control of Crimea and faced sanctions, the ruble lost a lot of its value. This currency crisis greatly impacted Russia's economy and politics, changing its position and relationships on the global stage.
Turkey's Currency Crisis (2018): The Turkish lira fell quickly because of worries about economic strategies and international conflicts. This situation caused inflation and economic problems in Turkey, impacting its political strength and relationships with other nations, particularly the U.S.
The Strong Dollar Era (2021-Present): The U.S. Federal Reserve increased interest rates to fight inflation, which made the dollar much stronger. This affected emerging markets, causing money to leave those areas and their currencies to lose value. As a result, the economic power and geopolitical situation changed.
Bangladesh has seen significant changes in its currency and economy, highlighting its growing role in the global market. The Bangladeshi taka has experienced pressure, leading to times of devaluation, mainly due to trade imbalances and external debts. A weaker taka can raise inflation and reduce purchasing power, affecting political stability and public opinion. Despite these currency issues, Bangladesh has achieved notable economic growth, particularly in the textile and garment industry. This growth has strengthened the economy, enabling investments in infrastructure and social programmes.
Like many countries, Bangladesh is influenced by global economic trends. Changes in major currencies, especially the U.S. dollar, can affect trade and remittances, impacting the local economy and political situation. Bangladesh's location, especially its ties with India and China, can shape its economic strategies and currency policies.
The relationship between currency strength and political power in Bangladesh reflects larger trends in economic growth, governance, and regional interactions, illustrating the complexities of its changing role in the global economy. Currency changes show how they can reflect political and economic situations while also causing more instability and change. This highlights the complex link between currency value and global political influence.
In short, currency strength is shaped by economic factors but is also closely linked to political issues. A strong currency can boost a country's political influence, while political instability can cause currency drops, creating a complex relationship between the two. Governments may adjust monetary policies to affect currency strength, which impact their political power. For example, a government might lower its currency value to increase exports and drive economic growth, aiming to improve its political image. A country with a strong currency may struggle with export competitiveness, leading to trade imbalances that can affect political discussions, especially in trade deals where currency value is debated.
A strong currency usually reflects a healthy and growing economy. When a country's economy is strong, its political influence tends to grow both at home and abroad. Economic strength can boost a government's credibility and allow for investments in social services, infrastructure, and defense. Countries with strong currencies often have more dominance in international markets and organisations, facilitating trade and investment and enabling them to use their economic power in diplomatic discussions and global policymaking.

Shamir Sakir is a banker. [email protected]