The Kuwaiti Dinar is the national currency of the country of Kuwait and currently it will cost you $3.28 to just get a single Kuwaiti Dinar, making it the most valued currency in the world. Not only is it the most valued currency, but also one of the most consistent as it has held this title for decades. Considering this, how was Kuwait able to create such a strong currency and maintain it for all this time? Before we jump into that, we have to first understand the different types of exchange rates, which are floating, fixed, and mixed. Floating exchange rates, like the name suggests, are linked to market activity.
It is dependent on the GDP of a country, total money in circulation, exports, imports, government expenditure, unemployment rate, the stock market, and a multitude of other factors. None of these factors directly impact a country's currency exchange rate, but they all play a role in influencing the exchange rate. You see, exchange rates are based on a currency's supply and demand on the foreign exchange market, which is basically the stock market of currencies. When more investors want your currency because of all of the reasons that I just mentioned, your exchange rate will go up.
The exact opposite is true as well. When investors don't want your currency, your exchange rate will fall. The vast majority of countries in the world use this system, and fluctuations in a currency exchange rate are usually quite indicative of how much an investor wants a specific currency. For instance, the Venezuelan Bolivar exchange rate has sunk into the ground as the country fights ever increasing inflation.
Evidently, currently, a Venezuelan Bolivar is only worth less than 5% of what it was worth. one year ago. Considering this, does this mean that Kuwait has one of the most sought after currencies in the world? Well, this is simply not true as they are one of the few countries that use a pegged exchange rate model.
A pegged or fixed exchange rate is simply deriving a country's exchange rate based on another country's performance. And as a result, The success of a given currency is directly dependent upon the performance of another currency. For instance, I could create a currency right now and peg it to the US dollar, meaning I can determine the exchange rate. I can say that each unit in my currency is worth 5 US dollars.
Of course, the value of my currency would fluctuate as the US dollar goes up and down, However, my currency will always be equivalent to 5 US dollars. But simply doing this doesn't mean anything as people from other countries actually have to value your exchange rate and buy stuff from your country for it to actually be a valid currency. Otherwise, sure, you could have a high exchange rate, but it wouldn't have any validity.
So how is the Kuwaiti Dinar able to build traffic for its currency? Well, as you may have already guessed, this is all possible due to Kuwait's rich oil reserves. In fact, 80% of the Kuwaiti government's revenue comes from petroleum-based products.
This enables Kuwait to maintain a consistent source of traffic for its exports. On top of this, over the years, Kuwait has had to consistently update its currency in order to keep it at the top. Wanting to replace their old currency, the Gulf Rupee, the Kuwaiti currency board created a new currency called the Kuwaiti Dinar and it was originally pegged to the British Pound. But, as I said before, an issue with pegging currency is that your currency is only as strong as the currency or peg too, and in the late 1970s and early 1980s, the exchange rate of the pound plummeted. Anticipating this fall, Kuwait's currency board was quick to switch to a peg on a basket of currencies instead of just one.
This allowed them to be less susceptible to fluctuations in the exchange rate of any one country. This system lasted all the way up to 2003 when Kuwait decided to peg the currency to the US dollar at an exchange rate of approximately 3 Dinars for 1 US dollar. But right before the subprime housing crisis, Kuwait reversed back to a basket of currencies and that is what they are still using. So what does all of this mean? Well, not much really, as since their currency is pegged, their currency exchange rate has nothing to do with the strength of their economy.
And this would be true even if it was a floating currency exchange rate, and a perfect example of this is the South Korean won. A single US dollar is equivalent to over 1100 South Korean won, but this doesn't indicate a weak currency as the South Korean economy is one of the strongest in the world. This disproportionately low exchange rate can be explained by South Korea's avoidance of decimal values.
A single Korean won is basically a cent as that is the smallest currency value in South Korea. It's like if the US stopped using the dollar and decided to calculate everything in cents. This would lead to a euro being equivalent to 109 cents as opposed to $1.09.
As you can see, neither currency has gained or lost value. It's simply a different type of currency. Similarly, the Kuwaiti Dinar's high comparative value doesn't mean anything as goods are simply relatively priced in the country.
So in the end, Kuwait was able to create the highest valued currency in the world by simply using its oil revenue as an appeal for traffic and then pegging a currency against the most consistent currencies during a given time period. So, next time you see a highly valued currency, make sure not to assume that this means wealth and prosperity, as the value of a country's currency is a bad measure of a country's economic performance. If you guys thought this video explained how Kuwait created the world's most valued currency, then make sure to drop a like, and consider subscribing if you'd like to see more questions just like this one logically answered. But until then, I'm Hari, and I'll see you guys on the next one.