In this article, we look at the 15 most powerful currencies in the world. To skip our detailed analysis of how we reached these rankings, you can head to the 5 Most Powerful Currencies in the World.
The United Nations recognizes 180 currencies as legal tenders. You have probably used some of them. Dollar, euros, pesos, and yen, among others. But which of these do you find the most desirable, and why? What makes a currency desirable and powerful?
Strength of Currencies
A currency’s strength is shaped by a variety of internal and external economic factors, such as foreign reserves maintained by the central bank, the role played by demand and supply forces in the foreign exchange market, a country’s balance of trade, and rates of inflation and growth. There are other key factors as well, such as the acceptability of a currency in international trade and its purchasing power with respect to exchange rates. We discuss three concepts that cover these aspects, and are recognized by analysts as the determinants of a currency’s power.
The currency central banks keep in significant quantities to conduct financial transactions like in international trade is called reserve currency. In simpler terms, this is the currency that countries hold in their foreign exchange reserves. According to a 2022 report released by the International Monetary Fund (IMF), 94% of all foreign reserves in the world are held in just five currencies – of which 59% are constituted by the U.S. Dollar. Another key indicator of a currency’s strength is foreign exchange trading volume, also called forex trading volume.
This involves buying and selling currencies of two different nations in pairs by measuring the value of one currency against another. According to a report in Forbes, EUR/USD is the most traded currency pair in the world in terms of volume. Each trade, when it occurs, represents the value of the respective currency that is being exchanged for another.
This is also referred to as the exchange rate. The currency may be supra-national, like the Euro, which is traded in 19 member countries of the European Union, or it may be sub-national like in Hong Kong’s case. The exchange rate regime, that is whether the currency is pegged, free-floated, or hybrid, is decided by the central monetary body of the country.
Central banks manage foreign reserves, whereas large commercial banks contribute the biggest to forex trading. Some of the leading companies in the forex market include Barclays PLC (NYSE:BCS), Citigroup Inc. (NYSE:C), Goldman Sachs Group Inc (NYSE:GS), JPMorgan Chase & Co. (NYSE:JPM), HSBC Holdings plc (NYSE:HSBC), Morgan Stanley (NYSE:MS), and UBS Group AG (NYSE:UBS). In the FX Market Best Banks Awards 2022, JPMorgan Chase & Co. (NYSE:JPM) won three awards in the currency pair spot market-maker category, whereas Barclays PLC (NYSE:BCS) won one.
As we will see in this article ahead, political and economic stability contribute to a currency’s strength. With a lack of one or both, currencies suffer. The Argentinian peso, for instance, is one of the worst performing currencies in the world, having lost 13% of its value against the U.S. Dollar in 2023, and plummeted 44% in 2022.
This is due to the country running out of reserves and experiencing hyperinflation of over 100%. Due to peso’s volatility, Argentines are buying up the U.S. dollar as a safe investment, which is further hurting the peso. The Irani Rial is also among the weakest currencies in the world.
It has continued to lose its strength due to economic sanctions because of its nuclear program. About 43,000 Irani Rials are exchanged to receive 1 U.S. Dollar. Zimbabwe abandoned its currency, the Zimbabwean Dollar, in 2009, due to hyperinflation in the country. The central bank even issued a one-hundred trillion dollar note that could barely buy a loaf of bread. Colombian peso, Cambodian Riel, and Ghanaian Cedi are also amongst the worst currencies in the world.
Challenges to the U.S. Dollar
The U.S. Dollar is the world’s most dominant reserve currency, with central banks holding 59% of their foreign reserves in the greenback. Nearly half of all international loans and debts are denominated in the U.S. Dollar, and close to 50% of the global trade is invoiced in it as well. However, the currency’s dominant reserve share has taken a hit in recent decades, according to a report released by the IMF. Share of the U.S. dollar as foreign exchange reserves in central banks has dropped from 71% to 59% since the launch of the Euro in 1999.
A report by the Congressional Research Service in 2022 has identified three main challenges facing the global dominance of the U.S. Dollar, which stem from shifts in the global economy and geopolitics. China’s economic progress since the 1990s has prompted Beijing to consider ways to promote the use of Yuan as a trading currency.
Moreover, Washington’s use of financial sanctions for foreign policy objectives could threaten the central role of the U.S. financial system. Impacted foreign governments are trying to explore ways to reduce reliance on the greenback. An example of that is Russia’s share of exports to BRICS member states invoiced in U.S. Dollars falling from 85% in 2018 to just 36% in 2022. Thirdly, the advent of digital currencies, like the cryptocurrency, also pose a threat the Dollar. A survey held by the Bank for International Settlements (BIS) in 2021 indicated that over 90% of the central banks are working on creating digital currencies, with about a quarter of them running pilot projects.
Methodology
To rank the 15 most powerful currencies in the world, we have used three metrics: whether the currency is a recognized reserve currency, its foreign exchange trade volume, and thirdly, its strength on face value in terms of exchange rate. Rankings have been determined on a mix of both qualitative and quantitative factors.
It requires mention that 94% of all foreign currency reserves are held in just five currencies. Around 90% of the daily forex trading volume is made up of 11 currencies. Understandably, the currencies with the highest share of global reserves also have the highest trade volume in the foreign exchange market.
For our rankings 1-11, we have used these two datasets. Rankings 12-15 have been made based on the strength of their face value in the foreign exchange market, since numbers for their share as the global reserve currency and daily forex trading were negligible enough to be considered among ‘others’.
Share of reserve currencies and forex trade volume have been considered as a greater yardstick than exchange rate to measure the power of currencies due to the fact that exchange rates alone do not present an accurate picture. While the Cayman Islands Dollar and Gibraltar Pound both have greater face value than the U.S. Dollar and Euro, you are more likely to use the U.S. Dollar and Euro when travelling on vacation to a third country or making international payments. That is power.
Composition of global currency reserves have been obtained from a 2022 report released by the International Monetary Fund (IMF). CMC Markets, which is a UK-based financial services company, and Forex.com, a subsidiary of StoneX Group Inc. (NASDAQ:SNEX) were used for information related to forex trading volumes and exchange rates.
15. Jordanian Dinar
We begin our list with Jordanian Dinar or JOD, the official currency of Jordan since 1950, after replacing the Palestinian Pound. On the exchange rate, JOD is considered as the fourth strongest currency in the world against the U.S. Dollar. According to a report, the Jordanian Dinar is widely used in the West Bank as well by Palestinians, alongside the Israeli shekel. 1 Jordanian Dinar is transferable to around 1.41 U.S. Dollars.
14. Omani Rial
Oman’s national currency, the Omani Rial or OMR, is next on the list. It is divided into 1,000 divisions called ‘baiza’, unlike most other currencies that have divisions of 100. The Omani Rial is amongst the strongest currencies in the world when exchanged against the U.S. Dollar.
Exchanging 1 Omani Rial can get you 2.60 U.S. Dollars, which makes it over 2 times more powerful than Pound Sterling in this regard, which has an exchange rate of 1.25 against the Dollar.
13. Bahraini Dinar
Introduced in 1965 to replace the Gulf Rupee, Bahraini Dinar is the official currency of Bahrain and one of the most powerful currencies in the world due to the island country’s oil exports. The currency is pegged to the U.S. Dollar to attract foreign investments and its code is BHD. 1 Bahraini Dinar can buy you 2.65 U.S. Dollars. The BDH is only second to the Kuwaiti Dinar in terms of exchange rate strength relative to the greenback.
12. Kuwaiti Dinar
Kuwaiti Dinar is the strongest performing currency in the world against the U.S. Dollar in terms of value in the foreign exchange market. Its currency code is KWD. It was initially equivalent to one pound sterling upon its introduction in 1960.
Kuwait’s wealth has been driven by its large oil reserves which have been instrumental in the strength of the Kuwaiti Dinar. You will receive 3.26 U.S. Dollars after exchanging 1 Kuwaiti Dinar. This makes the KWD the most-valued currency in the world in terms of face value.
11. Singapore Dollar
Singapore Dollar is the national currency of Singapore. It accounts for nearly 1.8% of all forex trade daily, making it one of the most traded currencies in the world. There are 100 cents in 1 Singapore Dollar. The currency’s code is SGD, whereas $ and S$ are used as symbols.
The Monetary Authority of Singapore releases bank notes in the denomination of $2, $5, $10, $50, $100, and $1,000. Singapore is a major global financial center, and in 2020, Goldman Sachs Group Inc (NYSE:GS) announced that it would join JPMorgan Chase & Co. (NYSE:JPM) in building a forex trading hub in Singapore. Trading 1 Singapore Dollar will get you 0.74 U.S. Dollars in the forex market.
10. New Zealand Dollar
New Zealand Dollar, or the NZD, is the tenth most traded currency in the world in the forex market. According to StoneX Group Inc. (NASDAQ:SNEX), it is due its large trade volume with Australia and China. New Zealand’s main exports are in the agriculture sector whose performance is tied to the strength of the NZD. Moreover, the currency fares well on face value as well, which is most likely a result of its impressive GDP growth, high interest rates, and political stability. In exchange for 1 New Zealand Dollar, you will receive 0.60 U.S. Dollars.
9. Hong Kong Dollar
Hong Kong’s official monetary instrument, the Hong Kong Dollar or HKD, is ranked 9th on Forex.com’s list of the world’s most traded currencies. Hong Kong is a special administrative region of China, and a major international trading and financial services center, which helps the region draw forex trading. The HKD is pegged to the U.S. Dollar at a rate between 7.75 and 8.75. If the HKD hits the lower or upper limit, the Hong Kong Monetary Authority intervenes to adjust its value. Trading 1 Hong Kong dollar will get you 0.13 U.S. Dollars.
8. Swiss Franc
Swiss Franc is the national currency of Switzerland and Liechtenstein. It is the eighth most traded currency in the world and holds a higher face value than the U.S. Dollar as well. The strength of the Swiss Franc, or CHF as it is abbreviated, stems from the fact that Switzerland is one of the wealthiest countries in the world and the CHF acts as a ‘safe haven currency’ for investors during financial instability.
The country adopts a neutral posture in geopolitical conflicts and has a closed-door banking system, both of which contribute to this reputation. The financial services company and investment bank, UBS Group AG (NYSE:UBS) is co-headquartered in Zurich and Basel. On the forex market, 1 Swiss Franc is equal to 1.10 U.S. Dollars.
7. Canadian Dollar
Canadian Dollar, with over $460 billion in daily forex trade, is next on the list of the most powerful currencies in the world. It is the seventh most traded currency in forex markets, constituting close to 5% of all trade every day. Abbreviated as CAD, the Canadian Dollar remains strong due to Canada’s trade volume with the United States. 75% of the country’s exports, mainly in gold, lumber and crude oil, are with its southern neighbor. On face value, exchanging 1 Canadian dollar will get you 0.74 U.S. Dollars.
6. Australian Dollar
The Australian Dollar is the premiere trading currency in the Asia-Pacific region, and the sixth largest in the world with a daily trade volume of $479 billion in the forex market as per StoneX Group Inc. (NASDAQ:SNEX). Abbreviated as AUD, it is managed by the Reserve Bank of Australia. Much of the currency’s strength is owed to Australia’s wealth of natural resources in gold, coal, and iron ore. 1 Australian Dollar in the forex market is transferable to 0.66 U.S. Dollars.
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Disclosure: None. 15 Most Powerful Currencies in the World is originally published on Insider Monkey.