How Global Economic Crises Affect Currency Fluctuations

Currency fluctuations can be volatile during a global economic crisis and anyone investing in Forex trade will attest to that. Economic shifts are mostly sensitive when it comes to currency, and during crises, exchange rates are subjected to massive disruption.

Usually, whenever there is a financial crisis, a confusion of trust in these economies is lost. A perfect example is the 2008 global financial meltdown. It was developed due to the collapse of large banks and financial institution that sparked panic all over. When the future is uncertain, investors tend to run to safe haven currencies like the U.S. dollar, or the Swiss franc. The value of this currency demand is strengthened while currencies from emerging markets tend to weaken. In this period traders of Forex markets experience dramatic changes in currency pairs.

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During economic downturns, the stock market also plays a huge role in the change in the currency. What happens when stock markets crash is that, fear and panic sets in amongst investors. People shift their money to safer assets, and this normally means foreign currencies. For instance if the value of euro is likely to fall because of worry related to the financial stability of European Union, Forex traders would quickly change positions in favor of currencies looked at as more stable, for example, the U.S. dollar. The results: one currency after another devalues so swiftly that others rise.

Another big factor tied to the economic crises and affecting currency values is inflation. When the economy is in trouble, central banks will print more money to try and jolt the economy. This may provide a short term solution, but this will inflate the currency and thereby erode its value. A good example is the hyperinflation of Zimbabwe in the late 2000s. Inflation spiralled out of control and the Zimbabwean dollar ended up being almost worthless. Trader watching the Forex markets closely would have seen this steep fall and adjusted accordingly.

Currency values have a direct connection to interest rates and are routinely set by the manipulations of central banks in times of crisis. In an economic downturn, central banks can lower interest rates, and in doing so, reduce the value of their currency as a store of value (to foreign investors). At low rates, international traders are less inclined to pick up this currency and when this happens, the currency gets less valuable. On the flipside, when a country raises its interest rates to fight inflation, the currency appreciates as investors want to get higher returns on their investments. For this reason, moves in interest rates have a large influence on forex trading as traders expect rate changes, and adapt their strategies accordingly.

A global economic crisis is not contained only within its countries but is a global economic crisis. Markets today are highly interconnected so that a problem in one country is easily transferred to currencies of other countries. When big economies struggle, as we did in 2011 due to the European debt crisis, or more recently due to mounting trade wars and tensions between the US and China, their struggles ripple across the world. With forex trading, investors can use the volatility caused by the uncertainty as a means to mitigate or diversify out of these risks, or at least look to profit from them.

This is very crucial to anyone involved in Forex trading. Finally, currency fluctuations are part of the game, however knowing how global economic crisis influences these changes should give more tint to trading.