Today I would like to talk about the devaluation of major west-world currencies, including the US dollar (USD), euro (EUR), and Swiss franc (CHF). In the previous post I talked about currency risk. It is due mainly to the appreciation/depreciation of currencies among the others. In recent years devaluation due to inflation is under control. For this reason I want to analyze more the fluctuations between currencies.
Currency Devaluation in Theory
Before analyzing the three currencies in question, it is important to understand the concept of currency devaluation. In simple terms, currency devaluation occurs when the value of a currency decreases relative to other currencies on the global market. In other words, a devalued currency requires more units to buy the same amount of goods and services.
There are several reasons why a currency can depreciate relative to other currencies. Here are some of the main reasons:
- Monetary Policy. A nation’s monetary policy, such as interest rates and money supply controls, can affect the demand for the nation’s currency. If a central bank cuts interest rates, for example, this can increase the money supply and cause the national currency to devalue relative to other currencies.
- Economic Factors. Economic factors such as GDP growth, inflation, foreign trade, and the balance of payments can affect the demand and supply of the national currency. If a nation’s economy has low GDP growth or a deficit balance of payments, this can cause the demand for its currency to decrease and cause it to devalue against other currencies.
- Geopolitical Factors. Geopolitical events such as trade tensions, general elections or economic crises can affect the supply and demand of the national currency. For example, if a political or economic crisis occurs in a country, investors may try to sell the national currency and buy safer currencies, causing the national currency to devalue.
- Financial Market Speculation. The currency market is also influenced by trader speculation on exchange rates. If investors expect a currency to depreciate, they can sell that currency early, depreciating it further.
Let’s see the evolution of 3 important currencies in the western world from the 2000.
The US dollar (USD) is the world’s reserve currency and has been the most widely used currency for global trade for decades. However, since 2000, the dollar has depreciated by 20% against the euro and nearly 50% against the Swiss franc. There are several reasons for the devaluation of the dollar, including:
- The US Trade Deficit. The US has had a growing trade deficit in recent years, which means that it imports more than it exports. This has led to a decrease in demand for dollars on the global market, causing the value of the currency to fall. A weak currency incentives US citizens to spend less in foreign products.
- United States monetary policy. The Federal Reserve cutted interest rates to zero from 2008 to stimulate the economy following the global financial crisis. This policy has led to an increased supply of dollars on the global market, which has caused a devaluation of the currency.
- US Public Debt. The United States has a large and steadily increasing public debt. This increased investor concern about the creditworthiness of the United States and led to a decrease in demand for dollars.
The euro (EUR) is the second most used currency in the world and was introduced in 1999. Since 2000, the euro has depreciated by 30% against the Swiss franc, but has gained 15% in value against the US dollar . Reasons for the devaluation of the euro include:
- Eurozone crisis. The euro underwent a significant devaluation as a result of the eurozone crisis, which began in 2009. The crisis led to a decrease in investor confidence in the European economy, causing a decrease in demand for euros on the global market.
- Monetary policy of the European Central Bank (ECB). The ECB adopted monetary policies to stimulate the European economy following the eurozone crisis, including a reduction in interest rates and the introduction of asset purchase programmes. These policies have increased the supply of euros on the global market, driving down the value of the currency.
- Political uncertainty in Europe. Political uncertainty in Europe, including Brexit and the election of populist governments in some European countries, has increased investor concern about the stability of the European economy and led to a devaluation of the euro .
The Swiss franc (CHF) is a strong and stable currency, which has often been used as a safe haven currency in times of crisis. Since 2000, the franc has appreciated by more than 80% against the US dollar and by 50% against the euro. Reasons for the devaluation of the franc include:
- Monetary policy of the Swiss National Bank (SNB). The SNB has implemented monetary policies aimed at keeping the value of the Swiss franc low against the euro to protect the Swiss economy from the consequences of the eurozone crisis. This policy led to a devaluation of the franc against the euro.
- Global monetary stimulus. The accommodative monetary policy adopted by major global central banks, including the Federal Reserve and the ECB, has led to an increase in the supply of currencies on the global market. Swiss franc it was seen as a reserve currency as its monetary supply was not being raised.
- Geopolitical Factors. The global geopolitical situation, including trade tensions and political crises in some countries, has led investors to seek refuge in currencies away from conflicts such as the Swiss franc.
If the world continued in this direction, the Swiss would always have a strong currency. Unfortunately this is not the best thing for the Swiss economy as it does not help them to export. Of course, the value of currencies is not always in line with the cost of living. I’ll leave you something below.