As long as people have been using money, economic events have had a major impact on humanity.
History has been shaped by economic disasters, for better or worse. Wars have been started on their account. Conversely, historic events have never failed to impact the regional or global economy. World War 1 left Germany with a bleak economic future, which was a significant factor in the start of World War 2. The Great Depression shaped the 1930s, shaping the future of America and its immigration policies. The economic value of oil has led to war and upheaval in the Middle East and elsewhere.
The currency market, of course, was not left untouched. Every economic and political event, and every crisis, has an impact on the value of a country’s currency.
The following are 12 major historic events that in turn had a significant impact on the modern currency market at the time of occurrence, and had an impact surpassing the rise and fall of speculators and international business foreign exchange transactions. These events have shaped the world as it is today.
12 Events That Had A Great Impact On Currencies:
1. Nixon Shock
Up until 1971, major currencies had worked according to the Bretton Woods system. The system was created to stabilise economies during and after the period of the two world wars. It pegged the US dollar to the price of gold and set up fixed exchange rates, using the dollar as a reserve currency.
In 1971, the US under President Nixon unilaterally terminated the agreement. The US dollar became a free-floating currency. Shortly after, the pound sterling followed suit. The Nixon shock changed the face of the currency market forever. With the dollar and pound now floating free, and other currencies following suit, the price of all the major currencies changed drastically.
2. 1973 oil crisis
In 1973, Middle Eastern states placed an embargo on oil trade, in response to the US involvement in Israel’s Yom Kippur War. Unable to trade one of the most important commodities, economies went into crisis.
The 1973 crisis impacted the pound sterling, which went through its own crisis in 1976. Inflation had risen, and markets thought the pound was being overvalued. It almost led to a collapse in the pound, which recovered due to government intervention.
3. Apartheid’s demise
The South African rand (ZAR) was valued at $1.40 until 1982. But in the 1980s, the Apartheid system came under increasing pressure. International sanctions began to erode its value at a rapid pace, and by 1985, $1 could buy ZAR2.
The rand’s decline continued with growing uncertainty over South Africa’s future and the rand depreciated to R3.60 to the dollar in 1994.
5. 1997 Asian financial crisis
Financial contagion in 1997 led to fears of an economic meltdown in Asia, which could have in turn led to a worldwide economic meltdown. The crisis started in Thailand, with an accumulation of foreign debt, leading Thailand almost to bankruptcy.
The crisis led to the collapse of the Thai baht. Urgent measures were put in place to save this important currency.
6. The Gulf War
Besides its obvious costs for both Iraq and the US, the Gulf War in 1991 had a significant impact on Iraq’s economy. The UN placed sanctions on the country, which had the intended effects on Iraq’s financial system.
One indirect consequence was that Iraq no longer had the Swiss printing method available to print currency. They adopted a new, inferior-quality dinar. Due to sanctions and overprinting by the government, the new notes devalued rapidly. Terror attacks have a lesser impact.
7. The Iraq War
Staying in the Gulf, the Iraq War started by the US in 2003 may have had its own hidden economic cause. A popular theory is that George Bush pushed for the war because Iraq had started trading oil in euros instead of dollars. Iraq was benefiting greatly from this change, but the US economy suffered.
The currency may have been the leading factor behind the war, which serves as an example of how heavily currency can affect the world.
8. 2011 Japan earthquake
What effect does a natural disaster have on an economy? What about its currency?
The heavy fallout from the worst earthquake to hit Japan in over a century led to interesting developments in the Japanese economy. While the economy suffered in the short term, Yen’s status vacillated. Initially, the value fell sharply. Then, with repatriation and insurance from overseas, it surged. The Yen is still today one of the most important currencies in the world.
9. European debt crisis
The Eurozone’s biggest crisis came in 2008 and has continued in some states to the present day. Countries had to be bailed out of debt, leading to widespread recession and economic collapse. The fallout led to a range of new regulations being introduced, changing the face of the Eurozone’s financial system.
The euro and some of Europe’s other currencies suffered and consequently fluctuated in the wake of this crisis, and it continues to be a factor in the euro’s value to this day.
10. Greece’s debt crisis
Greece was one of the hardest-hit nations in the Eurozone crisis. Major austerity measures were introduced and retained for years. Greece’s crisis did not end in 2008 and has continued at a varying severity ever since.
An indirect consequence of Greece’s crisis is surprisingly on the value of the Swiss franc and the property market in 2015. One of the few independent European currencies, the franc is seen as a safe haven, and Greece’s crisis continually drives people to invest in francs.
11. Russian financial crisis
One of the most recent ongoing financial crises is the one currently happening in Russia. This one was actually precipitated by the collapse of Russia’s currency – the ruble. Causes for the collapse in the ruble include plummeting oil prices and economic sanctions.
This serves as another example in which external factors such as commodities and politics can lead to major economic mishaps.
12. Brexit Decision – UK/ EU
On June 23 2016, the UK held a referendum to decide whether they want to leave the EU. The decision was “Leave” with 51% of the votes. While Brexit supporters named June 24 as the UK independence day, the market’s response was harsh. Instantly, the GBPEUR rate dropped from 1.34 (it hovered around that figure for a week) to 1.24, and continued to drop to 1.17 on June of 2016. 2 years later, it has continued to plummet into the currency GBPEUR rate of 1.13 (true for May 29, 2019). More currencies reacted as per below:
– US dollar: Before Brexit, the GBPUSD was at around 1.49, and it fell to 1.34 immediately, only to slightly recover, then further decline to 1.28.
– Australian dollar: Before Brexit, The GBPAUD was at around 1.96, and it fell to 1.82 on June 24, then recovered to 1.87 and fell to 1.73.
– Canadian dollar: Before Brexit, the GBPCAD was at around 1.95, and it fell to 1.76, a much steeper decline than the AUD and the USD, it then recovered to 1.8 and fell to 1.67.
– LIBOR Rates: View the example section on our LIBOR rate guide.
What Makes A Currency More Attractive To Investors?
Various factors make a currency more attractive to investors. Understanding these factors can help investors make better decisions when it comes to foreign exchange investments. Here are some key elements that contribute to a currency’s appeal:
Economic Stability: Investors are drawn to currencies from countries with stable economies. A strong economy often correlates with low inflation rates, positive GDP growth, and a healthy employment rate. These factors provide confidence in the country’s currency and make it an attractive option for investors.
Interest Rates: Central banks set interest rates to control inflation and stimulate economic growth. Higher interest rates often make a currency more attractive to investors because they can earn higher returns on their investments. This increased demand can lead to an appreciation of the currency’s value.
Political Stability: A stable political environment is crucial for a currency’s attractiveness. Political stability ensures that there is less likelihood of sudden policy changes or disruptions that could negatively impact the economy. Investors prefer currencies from countries with a stable government and a low risk of political turmoil.
Safe-Haven Status: Some currencies, like the US dollar, Swiss franc, and Japanese yen, are considered safe-haven currencies. These currencies typically appreciate during times of global economic uncertainty or crisis, as investors seek to protect their assets by moving them into safer and more stable investments.
Market Liquidity: A highly liquid currency market allows investors to quickly buy and sell currencies with minimal impact on the currency’s value. This liquidity allows investors to react to market fluctuations and adjust their portfolios as needed. Major currencies like the US dollar, euro, and Japanese Yen are highly liquid and attractive to investors.
Diversification: Investing in various currencies allows investors to diversify their portfolios and reduce overall risk. Investing in currencies from different countries and regions can mitigate the potential negative impact of economic or political events on their investments.
Factors That Influence Exchange Rates
Exchange rates are influenced by a variety of factors, both economic and political. Understanding these factors can help investors and businesses make informed decisions when engaging in foreign exchange transactions. Here are some key elements that can impact exchange rates:
Interest Rates: As mentioned earlier, central banks set interest rates to control inflation and stimulate economic growth. Changes in interest rates can influence exchange rates, as higher interest rates generally make a currency more attractive to investors, leading to increased demand and an appreciation of the currency’s value.
Inflation Rates: Countries with lower inflation rates tend to have stronger currencies, as the currency’s purchasing power remains relatively stable. Conversely, high inflation rates can lead to the currency’s value depreciation as the purchasing power diminishes over time.
Economic Indicators: Economic indicators, such as GDP growth, unemployment rates, and trade balances, can provide insight into a country’s economic health. A strong economy with positive indicators often leads to an appreciation of the currency, while negative indicators can result in depreciation.
Political Stability and Economic Policies: Stable political environments and sound economic policies contribute to a strong currency. Political uncertainty or instability can lead to fluctuations in exchange rates, as investors might be hesitant to invest in a country facing potential upheaval. Additionally, economic policies, such as fiscal and monetary policies, can directly impact exchange rates.
Market Sentiment and Speculation: Traders and investors often react to news, events, or rumours that can influence their perception of a currency’s value. This market sentiment can cause exchange rates to fluctuate as investors buy or sell currencies based on their expectations of future value.
Intervention by Central Banks: Central banks may intervene in the foreign exchange market to influence the value of their currency. They might buy or sell large quantities of their currency to stabilize or manipulate exchange rates to achieve specific economic objectives, such as controlling inflation or supporting economic growth.
International Trade and Capital Flows: The balance of trade, or the difference between a country’s imports and exports, can impact exchange rates. A trade surplus (more exports than imports) can lead to an appreciation of the currency, while a trade deficit (more imports than exports) can result in depreciation. Additionally, foreign investments and capital flows can affect the demand for a currency, influencing its value in the foreign exchange market.
By understanding these factors, investors and businesses can better anticipate and react to fluctuations in exchange rates, helping them make informed decisions in the complex world of foreign exchange markets.
As with any history, the purpose of understanding it is to stop it from repeating itself. When it comes to the economy, we need to be wary of the fallout of anticipated events. Oil, for example, is still a major driving factor of economies in the Middle East and throughout the world. One thing that can be guaranteed is that the price of oil will not stay stable. In 2016, commodity prices were dropping, leading to economic uncertainty.
There is also much to learn from the various recessions that have occurred throughout history. While the Great Depression may seem far away, crises in the ‘90s, ‘00s and ‘10s should serve as warnings of what may come. Some speculate a global recession is on the horizon. We will have to wait and see, and in the meantime, prepare, as anything might happen.
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