Factors that Affect Currency Value – Part 2

There are many factors that influence the value of a currency and determine whether it rises or falls against other currencies. In order to see what fundamental analysts take into consideration when studying the markets, we will first concentrate on major geopolitical and social events which have the power to affect the stability of an economy and, in turn, cause currency appreciation or depreciation.

Natural Disasters

Natural disasters include extreme weather phenomena such as floods, earthquakes, hurricanes and tsunamis. Such events are often unpredictable and can cause widespread catastrophe in a country. Casualties, damaged infrastructure and the general sense of unease and fear that usually follows a disaster can have a detrimental impact on a country’s economy, especially since the government will have to invest a lot of money in repairs. It is possible, of course, that other countries will benefit greatly from a disaster which occurs abroad if they export goods and services to the disaster-stricken country.

It is usually the case, then, that a currency will weaken in the aftermath of a natural disaster. The Japanese yen, for example, weakened up to 0.4% against the U.S. dollar following the catastrophic earthquake and tsunami of 2011, which caused more than 15,000 deaths, left thousands injured and missing, saw shortages of food, water, medicine and shelter, and left approximately 340,000 people displaced. Similarly, the 2011 earthquake in New Zealand caused the New Zealand dollar to fall approximately 2% against the U.S. dollar. It is likely, however, that a currency may go on to regain much strength once relief efforts begin and the country affected by disaster gets back on the road to recovery.

War & Conflict

A war can have as catastrophic an impact on a country as a natural disaster, if not greater. Countries involved in conflict must finance their efforts against the enemy, cope with casualties, shortages and infrastructure damage, and manage a widespread sense of uncertainty that naturally destabilises the economy. An ongoing conflict can therefore lead to much market volatility and cause the depreciation of currencies.

Political Events

Political events and, in particular, political elections, usually have a significant impact on currency value and often cause notable fluctuations. This is because the period leading up to an election is largely perceived as a time of uncertainty. If an upcoming election is likely to result in a change in government and, potentially, a change in the approach towards a country’s monetary or fiscal policy, the political instability which prevails will more than likely be reflected in economic instability. Other political events, including unexpected elections or scandals also cause market volatility and influence the value of a currency.

Did you know?

If overwhelmed by pessimism and falling prices, the FX market is defined as “bearish”, while if characterised by optimism and rising prices, it is called “bullish”. These two terms derive from the way in which bears and bulls attack their opponents, with the former swiping its paws downwards and the latter thrusting its horns upwards.

Word of the day
"Swing Trader" - A currency trader who places short-term trades in order to benefit from short-lived trends.
Pro Tip

Most market activity occurs when at least two market centres are open at the same time.