LETTER: ‘Currency strength’ is a misleading term
But exchange rates are often viewed as important indicators of how strong or weak an economy is
Most people, even emeritus professors of economics, tend to get it wrong when discussing or analysing currencies and exchange rates. In “The Gold Price, the Rand and the Economy” (On My Mind, May 25-31), Graham Barr and Brian Kantor state: “In early 1980 the rand reached a peak of R1.32/$; yes, the rand was actually stronger than the dollar!”
The first error, of course, is that the exchange rate between the rand and the dollar was R0.76/$ or $1.32/R. (See editor’s response, below.) The rand was in fact much “stronger” than they tried to point out.
But does the simple fact that currency A has appreciated against currency B imply that currency A is “stronger” than currency B? Of course not. By the same token, a “weak” currency may be more desirable than a stronger one. Such terminology should preferably be avoided — after all, an exchange rate is simply a price (of one currency in terms of another) and you seldom, if ever, hear about strong or weak prices.
Exchange rates do, however, tend to be emotional and political issues, and nominal rates are often regarded as major indicators of the strength or weakness of the real economy. When the rand was threatening to fall below parity to the dollar, Gerhard de Kock, then governor of the Reserve Bank and a strong advocate of market-determined exchange rates, was rumoured to have arranged to be in Canada to avoid the social and political flak when South Africans had to pay more than a rand to purchase one dollar.
A final terminological note: while currencies can strengthen or weaken, exchange rates cannot do likewise. “The lowest exchange rate on record” is therefore a meaningless concept.
Philip Mohr (emeritus professor of economics)
Somerset West
* The emeritus professor is, of course, right that in 1980, R1 would have cost you $1.32, making South Africa’s currency stronger than that of the US — rather than the way we printed it in last week’s edition, which was R1.32/$. However, this was not the fault of the esteemed experts who wrote that column, Graham Barr and Brian Kantor. Rather, it was an error made during the editing process — and we apologise for that the error.