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The foreign exchange market is sometimes known as the FX market. It is the world’s largest and most active financial market. Every day, people from across the world conduct trillions of dollars in foreign exchange transactions.
The forex market is global and interconnected. Events from all around the world may have an immediate impact on exchange rates and currency prices.
Elections can be considered by traders as a single instance of possible political instability and uncertainty. Which often translates to more volatility in a country’s currency value. In most cases, forex traders would merely monitor pre-election polls to get an idea of what to anticipate and to see if there are any changes at the top. That’s because a change in government may result in a shift in people’ ideologies, which generally translates into a new approach to monetary or fiscal policy, both of which are important determinants of a currency’s value.
Another critical scenario is an unexpected election. Unplanned elections, whether the result of a no-confidence vote, corruption scandals, or other circumstances, can devastate a currency. Cases of civil unrest that result in protests or work stoppages may create significant uncertainty in governments and exacerbate political instability.
Even when an authoritarian government is overthrown in favour of a new, more democratic, and economically open one, forex traders dislike the uncertainty. In the near run, political volatility tends to overshadow any beneficial results from a new government, and linked currencies often incur losses.
However, basic valuation considerations and concepts will apply once again, and currencies should settle at or around a rate indicative of the country’s long-term economic development prospects.
Natural disasters may have disastrous consequences for a country. Earthquakes, floods, tornadoes, and hurricanes all have a negative impact on a country’s inhabitants, morale, and infrastructure. Such tragedies will also have a detrimental impact on a country’s currency. The loss of life, damage to important manufacturing and distribution centres, and the uncertainty that natural catastrophes invariably bring are all poor news for a currency.
When it comes to the impact of natural disasters, infrastructure destruction is also a major worry. Because fundamental infrastructure is the backbone of every economy, interruptions in such infrastructure may significantly limit a region’s economic production.
Furthermore, the additional expenditures necessary to clean up and rebuild after a disaster divert funds from government and private investment that could have been utilised for more profitable initiatives rather than patching up a break in the value chain caused by infrastructure damage.
Effect of War
A physical war may be considerably more detrimental to a country’s economy than a currency war, in which nations intentionally aim to lower their currencies in order to benefit their local economies in global export commerce. War, like a natural calamity, has a terrible and pervasive impact. Similar to natural disasters, the damage caused by war to infrastructure has a significant impact on a country’s short-term economic sustainability, costing individuals and governments billions of dollars.
History has demonstrated that post-war reconstruction efforts are frequently supported with cheap money as a result of decreased interest rates, which eventually reduce the value of the native currency. There is also a great deal of uncertainty around such wars in terms of future economic prospects and the health of impacted countries. As a result, countries that are actively at war have higher levels of currency volatility than those that are not.
Some economists feel that conflict might have a positive economic impact. War may jump-start a nascent economy, particularly its manufacturing sector, which is obliged to focus its resources on wartime output. For example, the United States’ involvement into World War II in response to the Pearl Harbor attacks aided in bringing the country out of the grip of the Great Depression. While there is some historical precedent for this point of view, most people would agree that improving the economy at the expense of human lives is a terrible trade-off.