How Global Events Impact upon Currency

global event effect currency

Often global events have an impact on world economic conditions and can spill over into global currency changes. These impacts can cause a country’s economy. Not only to have bad consequences for global entrepreneurs but also for the general public. Although not all will be affected.

For example, someone borrowed $ 2000 from a friend overseas at an exchange rate of 1 USD equaling 300 MYR. However, due to major conditions in the world. For example, natural disasters have caused the MYR currency to weaken to 1 USD equal to 500 MYR.

Thus the person who borrowed $ 2000 USD had to repay the ringgit amount greater than when he received the loan. So when he borrowed he received an amount of 6000 MYR. And when he paid the debt he spent 10 000 MYR. In this case, he has to spend an additional 4000 MYR as a result of the weakening of the MYR currency.

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What is a Global event in the economy?

Global events are a condition where it becomes a global issue and can affect the overall conditions in a country and the impact can have global consequences.

Such incidents can occur in financial markets or be caused by natural conditions that have experienced disasters. Or can also occur due to unsustainable security conditions caused by wars between several countries which consequently have an economic impact on other countries.

Political conditions, especially in countries that have global influence. Such as America and Europe can also have an impact on the economies of other countries because they indirectly depend on these countries.

Extraordinary events that have never been predicted before may occur as a result of shifting and changing the investment climate for various reasons.

As an example of an extraordinary event that has never been predicted before. An earthquake with high strength can devastate a certain geographic condition of a country. As a result, companies that have manufacturing products in that area become unable to operate and as a result, the supply of goods becomes interrupted.

Why Global event impact currency?

An event can affect the currency if it results in the economic conditions of a country or as a cause of bad conditions in that country. Events such as natural disasters, like earthquakes or forest fires, can result in economic stagnation. So that on a small scale they can affect the value of the country’s currency.

If an earthquake occurs in one geographic area and destroys many houses and public infrastructure. This will require a large amount of money for repairs, and there is a high probability that the government will spend more currency on the repair process.

If this amount of money is very large, of course, it can cause the currency to weaken. Even though it may be in a small volume, this is because the forex market is very large and no one force can control it for a long time.

Security conditions that are less conducive to a region can also have an impact on economic conditions. Especially in countries that are close to them or countries that are dependent on conflict countries.

Investors will usually think about regional security before investing in their capital. For example, building a factory, if security is vulnerable to risk then investors will think twice about investing. And maybe even investors will think about moving their factories to other countries that are considered safer and more conducive.

This can also have an impact on the country’s currency, which may depreciate because many businessmen fled to other countries. And this can have an impact on the country’s currency. If there is a rush where many businessmen fled their capital abroad, they will automatically sell the country’s currency and weaken the currency.

Effect Political event to currency

Political conditions are one of the factors that can affect the value of a currency. Because all economic policies made and implemented by a country cannot be separated from the political role that underlies its creation.

The following are some political events that can cause changes in the value of a country’s currency:

Elections

The election period is a country in uncertainty. Thus, the condition of policies, including the economic policies to be implemented by the government, is currently in an uncertain condition. This kind of uncertainty creates a big potential risk so that the investors tend to secure their funds.

With the decreasing interest of investors in investing in that country. The value of its currency has also decreased due to decreasing sources of incoming funds.

Like when there was a vote between pro Brexit and contra Brexit when the UK voted to decide to leave Europe or continue in the European Union. The result is that the currency fluctuates very high, and occurs very quickly when GBPUSD and other pairs that are paired with GBP experience very wide movements.

And it is possible that the US election on November 3 will result in the USD currency fluctuating with large changes in value.

Social Uncertainty

The unstable socio-political conditions also have a great influence on the value of the currency. When people begin to distrust the prevailing government, social tensions arise which can disrupt economic conditions.

This can lead to the withdrawal of investment by foreign investors because the government fails to carry out its duties and consequently can reduce the value of the currency.

Conflict Between Countries

Conflicts between two or several countries can also affect the value of a country’s currency. This is because a conflict creates a very large potential risk for investment assets in a country.

For example, conflict can reduce the trade and business performance of multinational companies in a country. Or, if the conflict continues until a military confrontation occurs. The risk of investment assets becoming chaotic and damage will increase.

This can have an impact on entrepreneurs to choose to secure their assets in a safer country.

Political Controversy

Issues and activities of politicians can affect the movement of a country’s currency. When a senior state official issues a statement that has the potential to change the country’s political or economic system. The value of the currency will easily change too.

For example, when the USD was weakening some time ago. a senior United States government official actually said this was a good thing. Shortly thereafter, the USD value immediately fell drastically to its lowest point.

Effect natural disaster

Natural disasters are events that come suddenly, causing public panic. Although currently sophisticated technology with satellites is reported to be able to scan an area. The fact is that it does not guarantee humans can avoid natural disasters that occur.

Natural disasters can occur due to climate change. Or also changes in the earth’s plate which reportedly experienced movement in the depths of the land.

A large natural disaster that is capable of ravaging cities. It can have a negative impact on a country’s economy because it can reduce GDP. This is because a big disaster will cost a lot of money to renovate infrastructure that was damaged by the disaster.

For example, an earthquake that occurred in Japan a few years ago. This event caused the Japanese Yen to be forced to decline as a result of the natural disaster that hit one of the largest cities in Japan at that time.

Another example when occurs a Tsunami in Aceh Indonesia 2004 year ago, caused costs of 4.5 billion which lowered GDP by 3% where many investors would use GDP as an indicator of a country’s economy. Decreasing GDP can also affect the value of the currency which may also decline.

Effect War of currency

Currency wars can also have an impact on global economic conditions. For example, when there was a war on the Chinese currency and the US dollar, this turned out to cause other currencies to be affected by these conditions.

At that time as a step towards the US and China trade war where the US imposed high taxes on Chinese products sold in the country. Then China retaliated by taking action to weaken the Yuan currency. As a result, the low currency can cause Chinese exports to be considered cheap even though America imposes high trade tariffs.

Due to the weakening of the yuan currency, China as an export-oriented country will cause these conditions, China’s export activities will become more competitive.

This currency war has also contributed to risky financial assets from developing countries. The Chinese vs American currency war can cause the currencies of other countries, especially developing countries, to experience a weakening condition.

Effect global pandemic to currency

The global pandemic that has hit the world has paralyzed the wheels of the economy. Due to the fear of market players due to social distancing and lockdown regulations. Several companies went bankrupt and ended up laying off employees for the sake of company efficiency due to decreased sales.

Countries with low income or low GDP have an impact on their currency which depreciates against the dollar. This shows that countries with better economic strength will be more able to survive than countries with low economic strength.

Even though America has also experienced high cases of Covid, this country’s currency is still stronger than in developing countries. So analysts in developing countries have concluded that the impact of the pandemic on the currency is due to the weak foundations of the national economy.

However, in an uncertain condition due to the pandemic and the election in America. It seems that the volatility of the USD is still vulnerable to risk, and the possibility of investors securing assets by looking for safe-haven instruments such as gold.

In its history in 2020, the price of gold had soared to reach $ 2074 per troy ounce which until the press this level became the highest price of all time.

gold price history

Chart by Tradingview

The effect of the pandemic has read that the world is experiencing an unprecedented recession. In which several countries have entered a recession with negative economic growth.

It is inconceivable that when these conditions do not end. World conflicts will escalate due to tensions between the people and their governments.

Conflict may occur because of government policies that are not in accordance with the aspirations of the community. And eventually, protest against these policies. As happened in Italy where there was a protest with the rules for using masks and lockdowns.

Humanitarian crises

Humanitarian crises can also affect the value of a country’s currency. This humanitarian crisis can occur because the government has high loans. Meanwhile, many bonds are due but are unable to pay them.

For example, Venezuela, a country that only relies on oil products has a high debt ratio and experiences default. This condition led to unfulfilled food and medicine which eventually became a humanitarian crisis.

As the result, the Bolivar currency also experienced high inflation where 1 Dollar was worth 55,200 bolivars.

This high inflation occurred as a result of the humanitarian crisis. Where some parties blamed the government policy in setting prices too low where production costs were high.

This has made many importers avoid Venezuela because its low selling price does not provide an advantage compared to operating costs.

Bottom line

Global economic conditions are inseparable from various issues and factors that cause extraordinary events that impact currencies.

Successful forex traders such as George Soros also took advantage of the high inflation of the UK’s financial condition. So that he confidently sold Pounds Sterling and made a high profit from this condition. Despite his actions, many countries have blamed him for the impact.

This can be a lesson for currency traders. How to keep abreast of the latest developments in global conditions that can affect currency depreciation. So that we can understand which opportunities to benefit from these conditions that affect the value of the currency.

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