Currency value is more than simply the trading strength that a country has with its international neighbours, rather it is a direct representation of the stability of the nation and how much faith and interest the rest of the world has in it. Publilius Syrus once said, “Everything is worth what its purchaser will pay for it” – and this is very much true of currency value. If developments in Dubai catch the interest of foreign investors or their banana crops are in high demand, then the Dirham (local currency) will increase in value – but how do political or environmental disasters impact a currency?
USA 2008 Recession
The end of 2007 and heading into 2008 saw the crashing end of what Alan Greenspan famously coined ‘Irrational Exuberance’. Well known for living far beyond their means on a credit system, Americans suddenly saw their house of cards collapse as the property market suddenly began to decline. This caused thousands of people to fail to meet their high bond requirements, leading to foreclosure by the banks which, in turn, virtually destroyed many banks themselves. The 2008 recession had a ripple effect on many countries invested in America including Ireland, and its effects can still be felt.
Post WWI German Hyperinflation
Funding a war costs a great deal of money (which is why throughout history, although a moral ideal is typically given as the reason for prosecuting a war, there are really huge financial goals in mind, like oil access). During WWI, Germany’s Weimar government tried something different. Rather than raising taxes to fund their war, they simply printed out vast sums of paper notes.
After their defeat, the treaty demanded that Germany pay over six million pounds in reparations (an absurd figure) and the government answered by printing yet more paper notes. Within a few years the amount of money far outweighed the amount of goods available and the currency value plummeted until, in November 1923, a loaf of bread cost 201,000,000,000 Marks.
African Political Instability in the 1900’s
A great deal of a currency’s strength stems from the confidence that foreign investors have in it. It is, therefore, easy to understand why African currencies struggle to attain a serious value despite their share of natural resources and potential for development. Since the withdrawal of colonial governments, African political and military leaders (generally the same thing) have initiated a continuous system of rebellion, dictatorship and rebellion again.
This has suited many first world countries which have been proven as having a hand in subtly instigating such cycles in order to gain cheap access to the natural minerals prevalent in Africa.
Natural Disasters throughout History
Since a large portion of a country’s currency value is based on investor confidence, natural disasters which damage infrastructure or holdings are detrimental to an investment mentality. Although it recovered very swiftly, this could clearly be seen in the drop of the yen’s value in March 2011 when a tsunami followed a major earthquake. New Zealand, Australia and Thailand have all seen their share of currency devaluation during 2011 and this is a reality in the battle for currency valuation which will never change.
If your interest is in playing the forex market then learning these and other factors is an exciting part of the game.
Warren Kings is an experienced online content writer who enjoys writing about various topics concerning stock trading, currencies and world events. Currently he’s researching the easy to use metatrader 4 software for Forex trading
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One Response to “How Disasters Have Affected Certain Currencies”
Nice article. One thing to note is that some traders make more than others when natural disasters occur because of one annoying factor – the news wire. Depending on the service you use, you can get the news a lot earlier than others. We are only talking seconds here but they make all the difference.