The Forex market is the largest financial market in the world with over five trillion US Dollars worth of transactions taking place every day. It is a global market hence it reacts almost immediately to different events around the world that influence currencies’ value and exchange rates. Today we will focus on environmental disasters and how they influence the foreign exchange market.
Environmental disasters such as forest fires, earthquakes, floods, hurricanes among others have a detrimental effect on an economy. This further translates to the weakening of a currency’s value. Environmental disasters influence the Forex markets in the following ways;
Increase in Unemployment
Environmental disasters are destructive to businesses located in the areas affected. Destruction of businesses leads to loss of jobs which reduces consumer spending. This weakens a country’s currency value since the economy may not be able to provide employment for the population. A Forex trader may benefit by selling the currency of the affected country since it is weakening against other currencies.
This is the difference between the value of exports and imports of goods and services. Environmental disasters reduce the production capacity of a country especially forest fires that destroy agricultural land. This leads to exports that are lower than the imports which in the Forex market, indicates that the country’s currency value is depreciating. Selling the affected currency against the other currencies will be profitable for the trader.
Foreign investment boosts the currency value of a country. This is because, in order for foreigners to invest in a country, they have to convert into the country’s currency which increases its demand hence its value. However, countries prone to environmental disasters such as hurricanes tend to discourage foreign investment due to the high risk of loss. This deals a major blow to the economy of the country which translates to the depreciation of currency value. It is recommended to sell currencies of the affected currencies and buy currencies from countries less prone to environmental disasters.
Due to the increased unemployment caused by environmental disasters, retail sales decrease due to a drop in consumer spending habits. This is because there is less money in circulation to purchase products within the country. A decrease in retail sales depreciates currency value hence it is beneficial for a trader to sell the currency of the affected country.
Environmental disasters destroy infrastructure such as roads, railways which hinder the production activities of a country. This leads to depreciation of a currency value against other currencies. Therefore it is recommended to sell the currency against another.
Environmental disasters increase government spending afterwards as the country tries to recover from the catastrophic event. This leads to a decline in economic performance since there is little or no money for investment activities. Hence, the value of the currency depreciates.
Environmental disasters usually have adverse effects on countries’ economies but there are situations when the affected countries may benefit. This is the case where the country gets foreign aid which improves the currency’s value.