Does a not inflated currency represent a strong economy?

Question

I had an argument just a while ago. The main statement was that a strong currency has to reflect a strong economy. So as long as a country is not as economically powerful as the US, it will have a hard time issuing a currency that has an exchange rate of 1:1 to the dollar.

The Ghanaian cedis used to be 1:1500 which obviously reflects inflation. A year ago Ghana decided to issue a new currency which is now 1:1.097 to the dollar, which is as good as 1:1. The economy of Ghana has not changed; one currency has merely been replaced by the other. Isn't that enough to prove that a strong currency does not reflect a strong economy?

Does a currency which is not suffering under inflation always have to have a strong economy with many resources to back it? Or do those two things have to be seperated?

Answer 1

Currency exchange rate is result of market confidence and interest rates.

As higher interest rates are, as higher is currency, because investors buy currency. That's why the USA is in a pickle, the interest rates are to low for outside investors to buy US$.

Naturally, a healthy economy is base for any investor, that's without question.

If our economy was better, then we could increase interests and the $US would go up. But we can't otherwise busines will go even more flat.

We will go through some cleansing times for the next 10 years.

Answer 2

And it's even more complex!  The federal lending rate has an impact on inflation - with the rates low, businesses can borrow cheaply but the incentive to invest in the US is low.  As inflation becomes a stronger influence (as it will, 2 to 4 months at the outside) the FMOC will be prompted to raise rates, slowing business but strengthening the dollar.

We have only one thing to blame for this: greed.

Answer 3

While I must admit I know little about the Ghanaian cedis, the information you're giving has little relevance when talking about the strength of a currency.  The exchange rate used to be 1:1500, how does that compare over the past 30 years?  How do you figure that just because it is a high number that it must have been pushed up by inflation?

What is the purchasing power of the new currency?  I'm guessing just the same as the old currency.  Just because there are different ratios doesn't mean that one must be "stronger."  Also, remember that inflation occurs with booming economies and weakening economies.  Different types of inflation, but nonetheless every economy experiences inflation...

Remember, correlation does not imply causation!

*ADD-ON*

The value of a specific currency is determined by its own supply and demand.  So, a strong currency would represent a strong economy, all other things equal.  The problem lies in the fact that normally "the other things(variables)" are what determine values.  So, by properly forecasting what will happen to the main determinants of a country's currency, you can attempt to predict what will happen on the FOREX.