Currencies reveal the economic prosperity of a given country. In case of a global or local adverse event, the currency of a given country is significantly affected. The effect on the currencies is reflected in the forex market, thus affecting many transactions. Due to the close interconnectedness of the foreign exchange market, a slight fluctuation on one or more currencies is felt globally.
Due to the uncertainties and the volatility in the foreign exchange market, forex investors should be keen analyzers. For instance, a trader dealing with the rupee, should be concerned about how global events are likely to affect it. The effect on the currency may be direct or indirect. Common adverse events that affect currencies include the political climate, pandemics, wars, and natural disasters.
1. Local and Regional Wars
War, whether local or regional, significantly affects the economy. Similar to natural disasters, wars damage a country’s infrastructure, thus affecting its economy. Since rebuilding the infrastructure and reinstating the investors will be a lengthy process, the currency may be devalued for a long time.
Conversely, regional war can positively impact the economy of a given country. For instance, during World War II, the entry of the United States into the scene boosted its economy. The government invested heavily in manufacturing to ensure essential war supplies. Interestingly, this neutralized the effects of the Great Depression. Thus, the impacts of war can be diverse depending on the country and currency.
A careful investor should always know which currencies have been wrecked by war. Besides, they should figure out the currencies that are improving. For instance, the civil conflict and subsequent wars devastated Iraq’s currency. However, the country is undergoing massive infrastructural reinstatement with promising oil production. Therefore, there is a likelihood that there might be an Iraqi dinar revalue. Consequently, a keen foreign currency investor should be on the outlook for such a currency.
2. Political Climate
The political climate of a given country significantly influences the country’s currency. For instance, political instability is likely to affect currencies negatively. The currency is expected to suffer significant losses if there is an unlikely government change. Further, in cases where unplanned elections occur due to corruption or non-confidence poll, the currency is considerably wrecked.
In war-prone countries or countries with a history of unrest after elections, the currencies will be affected each time an election is arranged. Interestingly, it usually takes a long period for the currencies to regain their value even amid sustained growth.
A prudent foreign currency investor should know which countries have elections and analyze their pre-elections state. Further, they should examine the prevailing ideologies to gauge the likely change in monetary policies and other policies that affect the value of a currency.
3. Natural Disasters
Natural disasters are pretty expensive. Disasters such as floods, earthquakes, tornadoes, tsunamis, and hurricanes can cause massive property damage, deaths, and infrastructure damage. The destruction of the factories and the loss of personnel negatively impact the economy—the currency.
For instance, if an earthquake destroys the primary infrastructure of a given country, its economic output will be appreciably impaired. Further, the cost of reinstating the infrastructure will negatively affect the economy. Interestingly, a natural disaster can happen in a region comprising many countries, thus affecting the global foreign exchange market.
In case a country is hit by a major catastrophe, a prudent forex investor must modify their investments involving the country. Besides, they should monitor the recovery and make instructed investment decisions.
4. Global Pandemics
Pandemics usually impact the world economy negatively. Depending on the recovery rate, the currencies of many countries get affected. For instance, during the COVID-19 pandemic, the lockdowns and quarantines froze the world economy. Even the biggest economies in the world were significantly affected. However, according to the New York Times, the emerging countries were much more affected.
Consequently, the currency values on the forex market changed significantly following the effects of COVID-19. Therefore, a shrewd foreign currencies investor should evaluate the rate at which economies are regaining to inform their investments.
Factors affecting world currencies range from a local to a global scale. The major factors include wars, political instability, and pandemics. In many cases, these factors affect the economies negatively, thus devaluing the currencies. Therefore, a prudent investor should be keen on what is going on globally to make informed investment decisions.