What is a 'Weak Currency'
A weak currency, whose value has depreciated significantly over time, is commonly found in nations with poor economic fundamentals, which may include a high rate of inflation, chronic current account and budget deficits, and sluggish economic growth. Nations with weak currencies usually have much higher levels of imports compared with their exports, resulting in more supply than demand for such currencies on international foreign exchange markets if they are freely traded currencies. While a temporary weak phase in a major currency provides a pricing advantage to its exporters, such a benefit seldom accrues to exporters in weak currency nations since other factors such as high input costs and bureaucratic red tape may offset this advantage.
BREAKING DOWN 'Weak Currency'Currency is a commodity. For example, when a person exchanges dollars for yen, he is selling his dollars and buying yen. Because a currency’s value fluctuates often, a weak currency means more or fewer items may be bought at a given time. When an investor needs $100 for purchasing a gold coin one day and $110 for purchasing the same coin the next day, the dollar is a weakening currency.
Like every asset, currency is ruled by supply and demand. When the demand for something goes up, so does the price. If most people convert their currencies into yen, the price of yen goes up, and yen becomes a strong currency. Because more dollars are needed to buy the same amount of yen, the dollar becomes a weak currency.
Pros and Cons of a Weak Currency
A weak currency may help a country’s exports gain market share when its goods are less expensive compared to goods priced in stronger currencies. The increase in sales may boost economic growth and jobs, while increasing profits for companies conducting business in foreign markets. For example, when purchasing American-made items becomes less expensive than buying from other countries, American exports tend to increase, and the dollar weakens. In contrast, when the value of a dollar rises, exporters face greater challenges selling American-made products overseas.
Because more of a weak currency is needed when buying the same amount of goods priced in a stronger currency, inflation may climb when economies import goods from countries with stronger currencies. In contrast, low economic growth may result in deflation and become a bigger risk for some countries. When consumers begin expecting regular price declines, they may postpone spending and businesses may delay investing. A self-perpetuating cycle of slowing economic activity begins.
A weak currency may boost consumers’ incomes and tax receipts, benefitting debtors. When the value of debt remains the same, local borrowers may more easily pay down their debts. Conversely, paying back debt to foreign investors priced in foreign currency becomes more expensive.