TransWikia.com

Is there any pressure to keep currency exchange rates around 1?

Economics Asked by AndreiToroplean on May 21, 2021

I notice that for any pair of currencies, the exchange rates seem to stay around 1 (as opposed to, say, 1,000,000). This is no longer the case if one country experiences an economic crisis that results in a very high inflation, but otherwise, rates don’t seem to deviate very much from 1.

As you may have guessed I have very little knowledge in finance, so correct me if any of my assumptions are wrong, my aim here is to learn.

An example I’m thinking of is the Leu in Romania. It was revalued several times, the latest in 2005, when 10,000 old Leus were converted to 1 new Leu. That made the exchange rate with euros, for instance, closer to 1, given that 1 old Leu ≈ 0.00025 Euros, then 1 new Leu ≈ 0.25 Euros.

Why is this? Is this something most countries do? Does this principle have a name?

2 Answers

There are some counterexamples to the premise of your question:

Bank notes:

enter image description here

Price tags:

enter image description here

Bank notes:

enter image description here

Price tags:

enter image description here

Bank notes (note that they write "mil" in small letters instead of 000):

enter image description here

Price tags:

enter image description here

Note that $ denotes the peso, not U.S. dollars.

Bank notes:

enter image description here

Price tags:

enter image description here

etc. These countries are not in any kind of economic crisis. The exchange rates are reasonably stable. The large numbers don't inconvenience anyone (except for some badly designed IT systems that can't handle very large or very small numbers accurately). These countries are all doing well.

Conversely, let us consider two countries at the opposite end from "doing well", whose currency is rapidly depreciating versus USD:

  • A USD is somewhere around 1,000,000 Venezuelan Bolivar (VES). Venezuela did redenominate its currency from "VEB" to "VEF" to "VES", over the last few years, dropping many zeroes. It did not help. The rapidly depreciating currency is one of the symptoms of their economic problems, not the cause.

enter image description here

  • A USD is somewhere around 100 Russian roubles (RUB). The rouble has been depreciating rapidly for years, especially after the West imposed painful sanctions to punish Russia for its aggression against Ukraine in 2014. Russia did already redenominate the rouble from "RUR" to "RUB" dropping 3 zeroes not long ago:

enter image description here

That did not help. Russia is still broke:

enter image description here

Russians looking for expired food.

Desperate Russian officials can't avert another imminent sovereign default, but are looking to delay the inevitable. They discuss redenominating their rouble again, dropping 2 more zeroes, and making 1 new rouble more valuable than 1 U.S. dollar, probably some variant of the Soviet "confiscatory redenomination" of 1947 (see https://en.wikipedia.org/wiki/Soviet_ruble#Fifth_Soviet_ruble,_1947%E2%80%931961 ). This won't help. Except for stroking Russian national pride, I fail to see the benefit of having a currency unit worth more than 1 USD.

Let us therefore look at some examples of currencies whose 1 unit is worth substantialy more than 1 USD.

  • A Kuwaiti dinars (KWD) is somewhere around 3 to 3.5 USD . This does not pose any inconvenience when a subunit of the currency is small enough. A 1/1000 fraction of KWD, worth about 1/3 of US cent, is called "fil". Here is a 1/2 KWD (500 fil) bank note:

1/2 KWD note

Price tags:

enter image description here

This bottle of water costs 0.055 dinars, i.e. 55 fils, which is about 16 U.S. cents.

  • Chile widely uses an inflation-adjusted currency en.wikipedia.org/wiki/Unidad_de_Fomento - 1 unit of account is worth about 40 USD. It is not available as cash (bank notes or coins), but is primarily used to denominate real estate prices, stock prices, loans, etc.

  • 1 Bitcoin (XBT) is worth thousands of dollars as of this writing. Conveniently, one hundred millionth of a bitcoin is called a satoshi and can be used in transactions.

  • Back when the U.S. dollar had a lot more purchasing power than it has today, prices commonly used "mill" (1/1000 USD). It's still perfectly legal (see https://en.wikipedia.org/wiki/Mill_(currency) ) and is often seen as the "9/10" on U.S. gasoline prices:

enter image description here enter image description here

Contemporary gasoline prices.

enter image description here

Antique gasoline price sign: the gas costs 10.3 cents and the tax is 1.7 cents, i.e. 17 mills.

A good (but not quite complete) list of recent redenominations can be found in Wikipedia https://en.wikipedia.org/wiki/Redenomination#List_of_currency_redenominations . As you see, just swapping 1,000 units of the old currency for 1 unit of the new currency changes nothing. However in the 1947 Soviet confiscatory redenomination cited above, if the state owed you 10 old roubles before, then the state now owed you only 1 new rouble. But if you owed the state 10 old roubles, then you still owed 10 new roubles to the state. This may be the kind of scheme that Russian officials are contemplating again.

Answered by Dimitri Vulis on May 21, 2021

This is mostly done by the individual countries out of convenience. First, most countries have a main currency, say the US-Dollar, and this unit can be separated into 100 small units, ie cents. One cent is then the smallest currency unit available in the US.

So if a country had a currency with a value much higher than 1 US-Dollar, that would be inconvenient because prices could not be adjusted as accurately. Imagine everything have to cost an integer amount of US-Dollars.

Having a currency value much lower is also inconvenient because you have to keep track of all the extra zeros that don't add any additional information. This does happen as the examples Dimitri Vulis answer show. Usually prices are then marked not directly in South Korean Won but rather in units of 1000 Won again resulting in small easy to use numbers.

Answered by quarague on May 21, 2021

Add your own answers!

Ask a Question

Get help from others!

© 2024 TransWikia.com. All rights reserved. Sites we Love: PCI Database, UKBizDB, Menu Kuliner, Sharing RPP