It’s not easy to understand one of the most valuable currency in the world because calculating its value isn’t straightforward. Banks and markets set the exchange rates for currencies, but they are essentially arbitrary.
We’ll look at different ways for evaluating a currency, including exchange rate, purchasing power, and market under/over-valuation. For those interested in getting started in currency arbitrage and foreign currency exchange (FOREX) investing, this guide will cover the basic concepts you need to know when evaluating whether you should buy a currency.
Why the Most Expensive Currency and the Strongest Currency Aren’t Necessarily the Same
Most FOREXs use the U.S. Dollar as the baseline for comparing currencies side by side. Although the dollar is strong right now, it’s not the most expensive currency in the world. For example, the Euro and the British Pound are both more expensive currencies than the U.S. Dollar. However, FOREX exchanges use the U.S. Dollar as the baseline for all trades because of its stability over time and the fact that the United States has the largest economy in the world.
So, one way to compare various currencies to find the most valuable currency in the world is comparing its U.S. Dollar exchange rate to all other currencies. However, that only gives you a limited understanding of the currency’s value. Comparing exchange rates can be good for trading, but if you want to understand the true value of a currency, you’ll need to know what everyday items you can buy with that currency. This “true value” calculation is known as purchasing power.
Using Purchasing Power Parity to Find the Most Valuable Currency
It’s possible to compare currencies based on purchasing power. Economists have developed a system to do just that called purchasing power parity. At its most basic implementation, purchasing power parity involves creating a basket of everyday goods to purchase (e.g. – food, housing, other services) and comparing the cost of that basket of goods across countries.
Of course, not every country is the same. For example, Americans eat lots of bread while Chinese citizens eat mostly rice. As a result, it can be difficult to create a comparable basket of goods for purchasing power analysis. One solution popularized by The Economist, known as the Big Mac Index, uses McDonald’s hamburgers as a purchasing power comparison tool. The price of a Big Mac in one country is dependent on the cost of goods and services required to make the Big Mac in that country. Therefore, the Big Mac index compares purchasing power.
In theory, exchange rates should closely follow changes in purchasing power between countries. When an exchange rate doesn’t match up with the currency’s purchasing power, we call that currency under- or overvalued.
What Is the Most Expensive Currency in the World?
Outside of purchasing power parity, FOREX markets determine what the strongest currency in the world is. Anyone can trade on a FOREX market, and large institutional investors make bets on whether exchange rates will increase or decrease as a country’s economy improves or declines.
This 2016 map from Business Insider is now slightly outdated in terms of exchange rates, but it gives a great overview of the currencies used throughout the world and what currencies are the strongest. Using 2016 data on exchange rates with the U.S. Dollar, Investopedia found the most valuable currency in the world was the Kuwaiti Dinar, with the following countries rounding out the top five:
1. Kuwaiti Dinar
The Kuwaiti Dinar is the world’s highest value currency. This is surprising to many people as it is a very small country. Economic reforms haven’t really taken place recently because of the tension that exists within the government. Half of the GDP of Kuwait exists from exporting oil. This also makes up 94% of all of the goods which are exported out of the country. Kuwait has the second largest stock exchange amongst all of the Arab countries. This gives it an advantage when the time comes to move out of the oil industry. In one Kuwait Dinar, there are 1000 fils, and this is worth $3.31.
2. Bahraini Dinar
Bahrain is another country which is mostly reliant on oil for its GDP. It is also a rather popular tourist destination, which provides a big boost to the economy. Bahrain is a small island which is located to the west of the Persian Gulf. Although it is a very small country, it is a relatively free economy in comparison to the rest of the region. This is due to the fact that it has a lot of natural resources which they have been able to make the most of. The island is also home to a Grand Prix circuit which brings in a lot of revenue. One Bahraini Dinar (BHD) is worth $2.65.
3. Omani Rial
The Sultanate of Oman is another shocking addition to this list as it doesn’t export near as much oil as the neighboring countries. It is dependent a lot on the oil that it is able to export, however, there are many other aspects which make up its economies like agriculture and tourism. The country is hopeful that these aspects can be expanded over the next few years so that, when they are no longer able to export oil, the economy won’t take too much of a hit. This gives Oman an advantage over other middle eastern countries and it is considered to be a country of high income. One Omari Rial is equal to $2.60.
4. Jordanian Dinar
It is surprising to a lot of people that the Jordanian Dinar is on this list as the country is often provided with foreign aid. A lot of the country’s energy needs to be imported from other countries that are nearby. There are also a lot of struggles to provide everyone in the country with water on a daily basis. It used to share a currency with Palestine at one time, however, it gained independence from this country in 1946. Despite this, it didn’t get its own currency until 1959, which is when the Jordanian Dinar (JOD) was introduced. One JOD is worth $1.41.
5. British Pound
The United Kingdom was one of the few countries that decided to stick with the original currency instead of switching to the Euro. There is some manufacturing which takes places in the UK, however, much of the income comes from insurance and financial services. Although the economy has suffered since the decision to leave the European Union was announced, the UK is still in a better position than most of the other European countries. Once the Brexit process is completed, the value of the pound may drop even further. However, this is not certain and there is every chance that the economy can recover, even if there is a drop. One hundred pennies are equal to one pound. A pound is currently worth $1.34.
In recent years, these top currencies haven’t changed much. The top four are oil-rich economies, and as such their currencies remain stable and strong. While it’s useful to know which currencies are the strongest in the world, it probably won’t help you much if you hope to start FOREX investing, since investors make money when currency values change. These most expensive currencies remain fairly stable.
The Most Valuable Currency You Can Own
According to Business Insider, the most traded currencies in the world are the U.S. Dollar, Euro, Japanese Yen, and British Pound. Forex traders like the arbitrage between the world’s major economies. When Japan’s economy is growing relative to the United States, traders will sell U.S. Dollars to buy Japanese Yen. As they do, the market exchange rate between the two currencies updates, responding to the change in Japan’s economy.
The key to great FOREX investing is finding a currency that is under or overvalued and purchasing that currency or placing a bet against that currency, known as a “short.” For those interested in a deep dive into the world of FOREX investing as of 2017, this Seeking Alpha article covers the current state of the world’s economies and which currencies are under or overvalued right now.