Well i will agree to musers comment below that there is no world currency but tbh US$ is the world currency, if one were to choose a currency to be the world currency.

Now currency markets are made of two kinds of players largely - speculators and those that have an actual use for it for example, a european company looking to buy goods in dollars and therefore having to exchange euros for dollars.

The strength of the currency will depend on the health of country's economy and also how much that currency is actually in demand. Before I continue, you've asked a super complicated question, and therefore I don't have a simple answer but i will try.

If the health of the economy is great ie gdp growth is between 3 to 5% for a developed economy and inflation under control, debt levels are managable, employment is there, productivity is high.. well then people would like to invest in a country like that and therefore buy that currency. Speculators will also buy that currency. Interest rate outlook or inflation outlook also makes speculators buy or sell a currency, For example, if inflation in running high, such that, the real retun is negative, then people will sell that currency and buy a currency that offers more promising returns.

If the global economy is doing well, then people will start taking on more risk, and in that scenario, they will sell US$ and invest in high risk currencies like Indian Rupee or Chinese Yuan. Such emerging economies will also buy dollars to shore up their dollar reserves in this time, because money flowing into these countries will strengthen their currency which is bad for exports, so therefore they will try and stop that. If however, people perceive a lot of risk, then money will flow into safe currencies like JPY or CHF or USD.

Other than that, if energy consumption in the world is going up, then US$ will strengthen as most oil is traded in the world in US$.

In very basic terms, economic health and global risk appetite is what drives the US$ strength.

RE: Musing Posts