As the American economy slowly strengthens amid weakening growth in China and a fragile European Union, the U.S. Dollar Index has appreciated in value, rising 21% over the span of two years, as of July 2016. The robust greenback has had a ripple effect through the global economy, raising the cost of dollar-denominated debt and stalling international trade growth, in addition to depreciating the value of other currencies.
As of July 2016, the currency of Vietnam, the dong, was valued at roughly 22,376 units per U.S. dollar. This makes the dong the weakest medium of exchange out of the 180 total currencies internationally recognized as legal tender by the United Nations. However, the value of a currency relative to another is only important as a gauge to how much that currency has strengthened or weakened relative to the other currency from one point in time to another. As the most frequently used reserve currency of the world, the U.S. dollar is the most popular medium of exchange to use when making such calculations. Although the amount of dongs per U.S. dollar has risen by 238 since the start of 2016, this is only a 1% year-to-date (YTD) drop in the VND/USD exchange rate.
Comparably, the U.S. dollar-to-Venezuelan-bolivar exchange rate has risen from 6.29 to 9.98 YTD, resulting in a 37% depreciation of the bolivar relative to the greenback. This makes the bolivar the relatively weakest currency to the U.S. dollar for 2016 thus far. The weakness behind Venezuela's currency has been fueled by surging levels of inflation, greater than 700%, and a contracting economy that is predicted to shrink by 8% in 2016. This monetary and economic calamity has led to a domestic crisis where the severity of a food shortage grows every day, leaving 30% of children malnourished amid a rising rate of school absences. While the official USD/VEF exchange rate is at 9.98, in the country's thriving black market, a dollar is worth more than 1,000 bolivar, giving proper illustration to the extent of Venezuela's crisis.
Despite a healthy economy, the United Kingdom has experienced its own political and currency crisis, following the decision to sever its 43-year EU membership on June 27, 2016. Immediately after the Brexit vote, the pound fell 11% to a 31-year low relative to the U.S. dollar. Coincidentally, the GBP/USD exchange rate is also down 11%, YTD. Such a monumental move in exiting the EU has left many investors wary of Britain, due to enormous uncertainties facing the country’s future. Both Fitch Ratings Inc. and Standard & Poor’s have downgraded Britain's sovereign debt ratings. The process of exiting the European economic union is expected to last more than two years, bringing more uncertainty to how the situation may influence the international economy and currency markets of the future.
Chinese Yuan Renminbi
Contrary to Britain, the People's Bank of China (PBOC) has directly caused the devaluation of its currency, the Chinese yuan, from 6.493 units per U.S. dollar to 6.683 YTD. After reducing its foreign-exchange reserves by $2.62 trillion to $93.9 billion in August 2015, the CNY/USD exchange rate has since dropped by 7.5% over the past 11 months and by 3% YTD. The PBOC has devalued its currency to increase exports by making them cheaper in terms of the dollar. By doing so, China hopes to maintain its gross domestic product (GDP) growth by preventing the contraction of its largest sector, exports. However, devaluing the yuan to increase trade runs the risk of beginning a currency war, where export-dependent countries competitively devalue their currency, damaging the global economy in the process.