Forex traders have access to hundreds of currency pairs on the market. Some of these pairs are exceedingly volatile due to frequent fluctuations in the base and quote currencies. Some currencies are even considered as safe haven assets due to their high trading volumes and relative stability. Major currencies such as the US dollar, Swiss franc and Japanese yen are some examples of such assets.
It’s natural to think that the most demanded and liquid currencies such as Major currencies must be the strongest ones. However, that is not the case. The currencies of some countries residing in the Persian Gulf have emerged as the strongest currencies in the world, with the Kuwaiti dinar (KWD) leading the charge.
The KWD/USD pair has been trading well over the 3.0000 mark for two decades now and has cemented its spot as the strongest single currency in the world.
If you are interested in the reasons behind the strength of the Kuwaiti dinar and would like to trade it on the market – this article is for you.
How did KWD become the strongest forex currency in the world?
- The Kuwaiti dinar (KWD) is the national currency of the State of Kuwait, which was adopted in 1961
- KWD is the most valuable currency in the world, with one Kuwaiti dinar being worth over 3.2 US dollars
- Kuwait is an oil-rich country that exports over 1.8 million barrels of oil per day
- The government has been using the oil revenue to fund infrastructure projects and develop the country’s private and public sectors
- The high demand for oil maintains the strength of the Kuwaiti dinar, which also benefits from a stable internal political climate
- The KWD has been pegged to a basket of currencies since 2007 – the composition of which remains undisclosed
- Due to the high value of the Kuwaiti dinar, it is characterized by very low volatility and is not typically actively traded for significant profits in the short term
How does the strongest forex currency perform against the US dollar?
The USD has been the primary currency used to exchange oil across the world. This created the term ‘petrodollar’ after the 1945 agreement between the US and Saudi Arabia.
Considering the heavy reliance of the Kuwaiti economy on oil exports, it is important to note how the currency has performed against the greenback in the long run.
Dinar has depreciated in value against the dollar recently but still holds at a remarkably high rate of over 3.0000 consistently. The primary reason behind the incredible strength of KWD is revenues from selling oil. Oil rich countries are often home to political and civil unrest and economic instability, as the over-reliance of hydrocarbons can lead governments towards neglecting other vital sectors of the economy, which causes economic growth to either be too slow, or become unsustainably high.
The Kuwaiti government has been steadily investing their oil revenues into crucial infrastructure and bolstering their private sector, which has led to massive GDP growth. The GDP number in 2022 stands at $186.5 billion. This sustained growth has further strengthened the dinar, which has only recently started losing value against the dollar due to the Federal Reserve’s aggressive monetary policy and interest rate hikes.
Which KWD pairs to trade
Traders who seek massive short-term profits might find that the Kuwaiti dinar is just too stable for the job. The currency hardly ever makes sudden price movements and usually indicates changing trends in the global economy, especially related to the export of hydrocarbons. Nonetheless, the currency pairs of KWD and major trading partners can be of interest to traders with a longer time frame in mind.
The Kuwaiti dinar/US dollar pair is important as the dollar is the primary mode of exchange for hydrocarbons all over the world. The dinar has a track record of solid performance against the world reserve currency and has remained above the 3.0000 mark for decades.
Traders may be interested in the pair as its movement indicates major shifts in the global oil and gas markets.
KWD was pegged to the USD between 2003 and 2007, after which the currency has been pegged to an undisclosed basket of currencies, with USD likely to have the highest weighting of the bunch.
The US is the second largest trading partner for Kuwait, amounting to 8.5% of the country’s exports – primarily oil and natural gas. The total export figure from Kuwait to the US amounted to $2.4 billion 2020.
China is the largest trading partner of Kuwait and amounts to 17.4% of the country’s exports ($4.94 billion in 2020). China, as the second largest economy in the world, has a lot of demand for hydrocarbon energy and the KWD/CNY shows the effects of trade between the two countries.
The KWD/CNY pair is characterized by more volatility, however, the pair is primarily useful as a mid-to-long term investment.
The pair has managed to stay above the 20.0000 mark for over two decades, but has seen some decline since the 2008 financial crisis. China’s economic growth has also strengthened the yuan considerably, which is part of the reason for the decline of the KWD?CNY pair.
With China’s economy facing issues stemming from the real estate market and growth starting to slow down, the KWD could start regaining momentum against the yuan. However, much like other pairs involving the Kuwaiti dinar, this prospect depends heavily on the global hydrocarbon market.
Japan is the fourth largest trading partner of the State of Kuwait. Kuwait exported $1.67 billion worth of goods to Japan in 2020, amounting to 5.9% of total exports for the Gulf state.
The KWD/JPY pair has been on the rise for over a decade now, which is due to the deflationary environment present in Japan and the Bank of Japan’s continuous increase in money supply to quell the deflation by devaluing the yen.
Even in 2022, after the effects of the Covid-19 pandemic and the war between Russia and Ukraine, the Kuwaiti dinar has increased in value against the Japanese yen, with the pari reaching above 400 basis points for the first time since 2014. This means that the KWD/JPY pair has returned well over 60% since 2012, making it a great investment over the past decade.
Saudi Arabia, one of the largest exporters of hydrocarbons in the world, is also one of Kuwait’s largest trading partners with 5.8% of Kuwaiti exports going out to the KSA. While a major trading partner, Saudi Arabia is also a competitor of Kuwait, with the two OPEC countries exporting a combined 8.5 million barrels of oil each day.
The KWD/SAR pair has been trading above the 10.0000 mark for decades, with the Saudi riyal starting to regain some ground since the start of the Covid-19 pandemic.
It must be noted that the Saudi riyal is pegged to the US dollar at an exchange rate of 3.75, which creates a significant correlation between the KWD/USD and KWD/SAR pairs.
The United Arab Emirates is another oil-rich country with deep economic ties with Kuwait. The countries are active trade partners, with Kuwait exporting $2.33 billion worth of goods to UAE in 2020, which is 8.25% of Kuwait’s total exports for the year.
The UAE dirham is another currency from the Gulf that is pegged to the US dollar, which makes the KWD/AED pair similarly dependent on the global hydrocarbon industry and the USD’s standing in the global economy. The countries share a stable political climate and the KWD/AED pair has been trading above the 10.0000 mark for decades with considerably lower volatility than other currency pairs on the global forex market.
Alternatives to the Kuwaiti dinar
For traders looking for currencies that are more valuable than the major currencies of USD, EUR, GBP, CHF and JPY, countries from the Persian Gulf can be of interest. However, keep in mind that major world currencies have the highest liquidity and the tightest spreads. The official currencies of most oil-rich countries are pegged to the US dollar, due to their disproportionate reliance on hydrocarbon exports. Here are three alternatives to the Kuwaiti dinar that traders might benefit from trading:
- Bahraini Dinar (BHD) – The official currency of Bahrain, a country in the Gulf of Persia, which is pegged to the US dollar at 2.659:1. The country is a major exporter of hydrocarbons and exported $3.19 billion worth of oil and gas in 2020. The economy of Bahrain is relatively modest, with a GDP figure just above $38 billion. The pegging of BHD to USD makes the Bahraini dinar the second most valuable currency in the world, only behind the Kuwaiti dinar
- Jordanian Dinar (JOD) – The official currency of Jordan, which is pegged to the US dollar, which is worth 0.7090 JODs, is another valuable alternative to the Kuwaiti dinar. Being pegged to the USD gives the Jordanian dinar stability to attract investment. However, this stability also means limited opportunities for short-term trading
- Oman Rial (OMR) – Oman is another country from the Persian Gulf that is heavily reliant on oil and gas exports and has its currency pegged to the US dollar for stability. The Oman rial is pegged to USD at 2.6008. While being pegged to USD might mean less volatility for OMR, it can still present opportunities for traders using currencies such as the EUR, GBP, CAD, CHF, and JPY
Main takeaways from the strongest forex currency
- The Kuwaiti dinar (KWD) is the world’s most valuable currency that trades against the USD at a rate of over 3.2
- Kuwait’s economy is heavily dependent on oil and gas export to trading partners
- Many of Kuwait’s partners have their currencies pegged to the Us dollar for stability
- The high degree of stability and low liquidity of oil-rich countries’ currencies makes them unattractive for short-term traders
- Traders can also choose the BHD, JOD and/or OMR as alternatives to KWD, as they are pegged to the dollar at a rate that makes them more valuable than the greenback
FAQs on the strongest forex currency
What is the strongest world currency?
The Kuwaiti dinar is the strongest and most valuable currency in the world today. One Kuwaiti dinar can buy more than 3.2 US dollars, which gives the currency much stability which limits opportunities for short-term traders
Why is the Kuwaiti dinar so valuable?
Kuwait is an oil-rich country that exports more than 1.6 million barrels of oil every day. The oil revenue has been used to fuel the country’s economic growth, which has given added stability to the national currency.
Can I trade Kuwaiti dinar?
Anyone can trade the Kuwaiti dinar. All you have to do is register an account with a forex broker, verify and fund it and choose a pair with KWD as its base currency and start trading.
Which currency is most traded in forex?
The US Dollar is the most traded currency in the world. The EUR/USD pair is the most popular and the most liquid currency pair in Forex. USD is also the primary reserve currency in the world. In addition, all major currency pairs include one part of the US Dollar as base or quote.