What is the relationship between economic growth and currency strength?

The relationship between economic growth and currency strength typically indicates that strong economic growth can lead to currency appreciation. When a country experiences robust economic growth, it often translates to higher interest rates as central banks may increase rates to control inflation and maintain a healthy economy. Higher interest rates can attract foreign investors seeking better returns on investments, which increases demand for that country's currency, leading to appreciation.

Additionally, strong economic growth can improve the trade balance if the country becomes more competitive internationally, resulting in greater exports than imports. This expansion in trade can generate additional demand for the domestic currency as foreign buyers have to convert their money to purchase the country’s goods and services.

In contrast, options that suggest strong economic growth leads to currency depreciation or has no effect misrepresent the typical dynamics of currency markets in response to economic performance. Generally, stronger economic fundamentals contribute positively to currency valuation.