The Forex market can either make you, as an individual or a country, wealthy or poor; there’s no in-between. One of the most common ways of determining a country’s economic health is by observing its Forex rate. It is the window to that country’s financial steadiness.
Global events have been known to have massive impacts on the Forex market. Due to the trillions’ worth of transactions done daily worldwide, Forex rates can significantly fluctuate. That is why traders must keep a keen eye on the exchange rates of different currencies.
Understanding the different events that affect the Forex market and rates will help you make more informed decisions when dealing with foreign currency. Here, we’ll look at some global events that have been known to influence Forex rates.
Global Events affecting the Forex Market
Decisions and actions made by a country’s political influences and leaders can negatively or positively affect that country’s currency strength. When a new government gets into office after an election, it tends to impose its economic policies. They can alternatively modify existing economic policies. As a result, that country’s currency will experience a rise and fall.
On the other hand, a country’s currency can be more robust if its government spends responsibly. Likewise, a country’s currency will weaken if the government in power has policies put in place which don’t favor businesses.
Example: Brexit, the China-US trade war, the French elections, etc.
2. Natural disasters
Tornadoes, floods, earthquakes, and hurricanes are some examples of natural disasters. These disasters not only affect the environment but also have catastrophic effects on a country’s economic productivity. The result is a possible currency decline. The reason being, infrastructure is mostly damaged in these natural disasters. As you know, the infrastructure is an economy’s backbone, and its damage means using funds to repair them. Therefore, private and government spending focuses on the affected areas.
Example: The 2011 Triple Japan Calamity, i.e., nuclear disaster, tsunami, and earthquake. This dealt one of the most significant blows any country’s economy could face. There was economic uncertainty which led to less consumer spending, and this caused economic cataclysm.
Just like natural disasters, war is always a big blow to a country’s economic viability. War causes grave damage to the infrastructure, and this costs a government a lump sum amount. A country affected by war also means uncertainty for its future economic demand. Countries engaging in war also experience high currency volatility.
It’s worth noting that war-engaged currencies are more inconstant as compared to currencies of countries that keep away from conflict. War is not always associated with bad news because there is another underscored aspect to it. It is the possible economic gains war has. The manufacturing sector usually gains when there’s war since there is high product demand, thus increasing production.
Example: The civil war in Congo which has seen the world’s richest country experience abject poverty.
Other Key factors affecting Forex Rates
Inflation rates also cause a change in a county’s currency exchange rate. When a country’s inflation rate is lower than another country’s, its currency’s value will experience appreciation. Moreover, when inflation is low, the price of services and goods increases slowly.
Interest rates changes also affect the value of a currency and its dollar exchange rate. Inflation, interest rate, and Forex rates correlate. When the interest rate increases, the currency will appreciate because the higher interest rates will attract foreign capital.
What’s more, the current account of a country can also affect its Forex rates. When the current account has a deficit caused by spending on importation of products, there’s depreciation. Payment of balance fluctuates the domestic currency exchange rate.
All mentioned factors are the ones that determine the Forex rate fluctuations. If you receive or send money more so internationally, you will benefit from being conversant with these factors. That way, you’ll be able to know when it’s best to make an international money transfer. In many cases, there’s complete uncertainty regarding daily development and future expectations of a situation.
As such, always remember that a nation’s currency depends on the nation’s economic growth. As such, adverse global occurrences can lead to unfavorable happenings in the foreign exchange market.