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Why for example, is the Japanese Yen trading very weakly (historically)? The exchange rate between the US Dollar and Japanese Yen is 1:79.791125 but the exchange rate between the US Dollar and Thai Baht is 1:30.742387.

I know that the Japanese economy is stronger (high GDP and all that) than the Thailand economy, but why is Thailand's currency stronger than the Yen? (As in, the exchange rate is 1:79 compared to 1:30)

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1:30 is not stronger than 1:79. These are just numbers.

Trading 1:120 in 2008 and 1:79 now vs. trading 1:31 in 2008 vs 1:30 now is much better criteria to look at to evaluate the strength of the currency, and if you look at that you can see that the Japanese Yen is significantly stronger than the Bhat.

While Yen gained 25% to its worth, Bhat gained nothing over the same period of time. You can also see that the Yen was very consistent, while Bhat was volatile over that period.

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    Nice answer. Kind of like comparing two stock's prices. The number alone means little.
    – JTP - Apologise to Monica ♦
    Commented Oct 29, 2012 at 19:08
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    +1 - This is generally true but fails when you compare the Yuan... Though that is a very corner case and definitely an outlier.
    – user4127
    Commented Oct 30, 2012 at 13:51
  • Thanks, I understand your point about the gain in Yen compared to nothing much for the Bhat, it makes sense. Just one question -- but why do I need only 30 bhat to buy 1 dollar compared to 79 yen to buy 1 dollar? As in, its still 30 vs 79. Or rather, why is the exchange rate between Bhat and Yen 1:2.6? If the yen is stronger, why is the exchange rate between Bhat and Yen 1:2.6?
    – Richard80
    Commented Oct 30, 2012 at 17:00
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    @Richard80 Value of the money. For a piece of paper that says $1 on it, you can buy a piece of paper that says 30 Bhat on it (or 79 Yen). But when you go to a store, you can buy exactly the same for either the $1 piece of paper, or 30 Bhat, or 79 Yen.
    – littleadv
    Commented Oct 30, 2012 at 18:12
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    @Chad Isn't the yuan pegged to the US dollar? You'd probably see much the same thing comparing the CHF to EUR these days. Or the various currencies that make up the euro prior to its introduction as an actual currency (ref. the various times around of European Rate Mechanism or ERM). Minimal if any movement against each other.
    – user
    Commented Oct 30, 2012 at 21:09
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The answer from littleadv perfectly explains that the mere exchange ratio doesn't say anything.

Still it might be worth adding why some currencies are "weak" and some "strong".

Here's the reason: To buy goods of a certain country, you have to exchange your money for currency of that country, especially when you want to buy treasuries of stocks from that country. So, if you feel that, for example, Japanese stocks are going to pick up soon, you will exchange dollars for yen so you can buy Japanese stocks. By the laws of supply and demand, this drives up the price. In contrast, if investors lose faith in a country and withdraw their funds, they will seek their luck elsewhere and thus they increase the supply of that currency. This happened most dramatically in recent time with the Icelandic Krona.

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  • Thanks, I understand your point, but if the yen is stronger, why is the exchange rate between Bhat and Yen 1:2.6? Why can 1 Bhat buy 2.6 Yen?
    – Richard80
    Commented Oct 30, 2012 at 17:01
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    Because it's not about the absolute numbers, but the buying power. The exchange rate itself tells you nothing about the value of a currency. The interesting question would be: How many dollars do you need to buy a Big Mac in Japan vs a Bic Mac in Thailand?
    – Lagerbaer
    Commented Oct 30, 2012 at 17:38
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You may as well ask why a piece of wood is 25 centimeters long but only 10 inches. Most units of measure are very arbitrary. Somebody decides that this amount of heat or distance or money is a convenient unit, and so that's what they use.

Suppose that tomorrow the government issued a whole new currency that had 10 times the value of the old currency. So if you used to make 10,000 foobars a year, now you make 1,000 new foobars. And likewise the price of everything you buy is divided by 10. If a certain model car used to cost 2,000 foobars, now it costs 200 new foobars. Are you better or worse off? Clearly if ALL prices change by the same percentage, then it makes absolutely no difference. (Aside from the hassle of making the switch and getting used to the new numbers.)

A currency where 1 unit of money buys more is not necessarily a "stronger currency". Any more than inches are "better" than centimeters because you get more wood for an inch than you get for a centimeter. A currency is said to be "strong" when it's value is stable or increasing relative to other currencies. If yesterday I could trade 10 foobars for 1 plugh, but today I only need 9 foobars to buy 1 plugh, then foobars are stronger than plughs. Even though I still need more foobars than plughs to buy the same item.

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