The latest news on everything from government policy to disasters impacts the stock market. Some of the trends like promises of tax cuts for businesses increasing the value of businesses and buoying stock prices, are well known. However, it isn’t as well understood how various events impact the foreign currency exchange market. How do current events affect the forex market?
Just as a nation’s domestic policies on taxation can impact the value of its stocks and bonds, its policies affect the value of its currency. Cyprus’ bail-in, where banks seized a portion of everyone’s bank accounts to pay for the nation’s debts, certainly hurt the value of its bonds, and similar assets seizures hurt the value of a nation’s currency.
Fear that Venezuela will default on its debts is causing the value of its currency to crash just as it happened when Argentina repudiated its debt, while its decline into totalitarian socialism/communism is destroying its economy and value of its currency. Any international embargo or restrictions on trade hurts a currency on the foreign exchange market, since far fewer people are allowed to buy the currency and there’s less trade overall to maintain the value of the currency. The markets can be volatile, and therefore traders should make sure they do their research before jumping in blind. Useful trading guides are widely available online, for example InvestinGoal have a range on their website, including one about the forex market. They specialise their guides to target social traders which is ideal as the social trading market is primarily forex.
Domestic policies with international implications can dramatically impact a currency’s value. Nations joining the EU and replacing their currency with the Euro wipes out demand for their national currency. Nations like El Salvador and Ecuador use the United States dollar as its currency, so international politics impact the value of their national currency. This can hurt a country when it is in economic doldrums relative to the dominant nation controlling the currency, since they cannot devalue their currency to make exports cheaper and incentivize domestic purchases. Greece discovered this the hard way.
Currency controls and tax rules can impact the value of a currency. Nations that limit foreign exchanges see the value of its currency decline because the forex market values liquidity.
Natural disasters can impact the foreign exchange market in several ways. If a nation is reliant on agricultural exports and a natural disaster wipes out that crop, its currency weakens because it isn’t backed by as strong of an economy for at least the next year. Natural disasters like earthquakes and wildfires that cause widespread damage in a nation can undermine economic growth, since people have to spend money to rebuild that otherwise would have been invested and grown the economy. (Spending money rebuilding doesn’t help an economy. This is the broken window fallacy.) Damage
to critical infrastructure tends to be worse for a nation than generic widespread damage, since a country like Kuwait unable to export oil suffers more economically long term than a developing nation like Bangladesh seeing hundreds of thousands of poor rural people displaced by flooding.
War impacts foreign currency exchange markets in several ways. Regime change can also wipe out a currency with the new regime refusing to recognise the old currency along with the old debts. A nation’s currency can be hurt indirectly by war due to fear of war as people sell their assets in a nation and move the money out of the country, reducing demand for the currency and causing it to weaken.
The Forex is dynamic and is tied to many factors. Domestic policy changes and international politics impact the forex market. Natural disasters can impact a nation’s currency, in particular disasters that hurt its ability to participate in the global market or are so widespread that it weakens their economy overall. War can dramatically impact a currency’s value, and that’s not including the cases where the currency is just wiped out when the nation loses and becomes part of another nation or suffers regime change.