If the strength of a country’s currency is determined by the strength of that country’s economy, why is the pound being overvalued over the dollar? In general, when the value of one country’s currency X is greater than the value of another country’s currency Y, it is not necessary that the economy of country X be stronger than the economy of country Y. For example: Japan’s economy is currently the strongest in the world, however, the value of The yen in the foreign exchange market is lower than the dollar. On the other hand, the Cypriot economy is weaker than the US economy, but the Cypriot currency is twice the value of the US dollar.
In fact, looking at the value of one country’s currency at a specific time and comparing it to the value of another country’s currency is useless. Therefore, the best way to judge the value of a currency is to compare it to other currencies over several periods.
In addition, the supply and demand for the local currency of a particular country are also taken into consideration when determining the value of the currency in that country. In addition, inflation is also an important factor in determining value. Know that there are other factors that control the value of a currency, and that changes in these factors together control the value of any currency.
Let’s take a simple example: Suppose a dollar equals 1.75 XYZ “virtual currency” at the beginning of the year, and a dollar equals 2 XYZs in the middle of the year. In this case, the dollar appreciated by about 14%. One of the reasons for this increase is inflation or a decrease in the demand for the currency in the country to which XYZ coin belongs.
The purchasing power of a currency (that is, what we can get with that currency) is also an important measure of a currency’s value. If 1 dollar equals 1XYZ, then the first thing that comes to our mind is the value of the dollar equals XYZ, but if the purchasing power of XYZ is equal to half the purchasing power of the dollar, then we can conclude that 1 dollar is worth more than XYZ because you can buy something worth 1 dollar, More than 1 xyz.