When we think about currency
exchange and the global markets, we often picture stock charts or financial
news that talks about numbers. But do you ever wonder why currencies go
up and down in value so dramatically? One of the biggest reasons behind these
changes is something that doesn’t happen in the markets themselves. It happens
in the world outside of the stock exchanges—the world of geopolitics.
Geopolitical events—things like wars, elections, and even natural disasters—can
shake up the Forex markets and cause big changes in currency values. This can
affect how much we pay for things when we travel, how much our investments
grow, or how businesses around the world operate.
In this article, I’m going to walk
you through the top three geopolitical events that can shake up the Forex
markets. I’ll also explain how you can stay prepared for these events to
protect your finances and investments.
How do Geo-political Events affect Forex Markets?
Before diving into how geopolitical
events affect the Forex markets, let’s take a moment to understand what Forex
markets actually are. Forex stands for foreign exchange. It’s the global
marketplace where currencies are traded. If you’ve ever traveled abroad and
exchanged your U.S. dollars for euros or yen, then you’ve participated in Forex
trading.
The Forex market is the largest
financial market in the world, with daily trading volumes reaching over $6
trillion. Yes, trillion. That’s a huge amount of money changing hands
every single day. Forex markets are incredibly important because they allow
countries to exchange their money with each other, whether for trade,
investment, or travel purposes.
But here’s the thing: these markets
are very sensitive. A small change in the global political environment—whether
it’s a war, a major election, or even a natural disaster—can cause big shifts
in the value of currencies. This can lead to market volatility, where one
currency suddenly gains value while another loses it.
1. Wars & Military Conflicts
One of the most significant
geopolitical events that can shake up Forex markets is war. Think about it:
when two countries go to war, there’s a lot of uncertainty. Wars can disrupt
trade, make supply chains unpredictable, and generally cause global nervousness.
Investors, who don’t like uncertainty, often pull their money out of risky
markets and look for safer places to park their funds. This could lead to a
situation where a country’s currency suddenly drops in value.
A good example of this is the
ongoing war in Ukraine. When Russia invaded Ukraine in 2022, the global markets
were shaken. The Russian ruble, for example, initially lost a lot of value
because of the sanctions imposed by other countries. Investors started fearing
that the war would cause economic chaos not just in Russia, but across Europe
and the world. As a result, currencies in neighboring countries like the euro
and the British pound also faced pressure.
At the same time, safe-haven
currencies like the U.S. dollar and the Swiss franc started to rise. This
happens because, during times of crisis, investors seek out currencies that are
seen as safer. These currencies tend to be less affected by geopolitical
instability. So, while the ruble and the euro were struggling, the dollar was
strengthening.
In short, wars can lead to drastic
changes in currency values, and understanding this can help you predict how
Forex markets might move in times of conflict. Knowing which currencies tend to
rise and fall during wars can help you make better decisions about when to buy
or sell.
2. Elections & Political Instability
Another major geopolitical event
that can shake up the Forex markets is elections. National elections,
especially in big countries like the United States, Brazil, or China, can cause
big movements in Forex prices. When a country holds an election, there’s often
a lot of uncertainty about what the future will hold. Will the winning party’s
policies benefit the economy? Will they raise taxes or cut spending? What about
trade agreements with other countries?
In the months leading up to an
election, currencies in that country may start to fluctuate as traders and
investors try to predict what the outcome will mean for the economy. For
example, if an election result could lead to significant economic changes, the
currency might fall in value as investors prepare for a shift. On the other
hand, if a country elects a leader who is seen as business-friendly or who
promises economic stability, the currency might rise.
Take the 2020 U.S. presidential
election as an example. Leading up to the election, there was a lot of
uncertainty about who would win and what that might mean for U.S. policies. The
U.S. dollar fluctuated during this time, reacting to polls, debates, and news
about the candidates. After the election, when Joe Biden won, the dollar
initially lost value, as investors anticipated higher taxes and more government
spending. However, the dollar started to recover as the new administration’s
policies took shape and the global economy began to stabilize.
Political instability can also have
a similar impact. For instance, when there’s a coup or a sudden shift in
leadership, currencies can lose value as investors pull out their money,
fearing a volatile future. The currency might stay unstable until a clear
picture of the country’s political future emerges.
So, it’s important to keep an eye
on elections in big countries and understand that political changes—whether
expected or not—can cause major shifts in Forex markets.
3. Natural Disasters & Pandemics
While we often think of wars and
elections when we talk about geopolitical events, natural disasters and
pandemics are another huge factor that can influence Forex markets. When
natural disasters occur—like earthquakes, tsunamis, or hurricanes—they can disrupt
economies and lead to currency fluctuations. This happens because these events
can damage infrastructure, disrupt trade routes, and cause financial losses
that affect the value of a country’s currency.
The COVID-19 pandemic, for example,
had a massive impact on global currencies. When the pandemic first hit in early
2020, it caused major economic disruptions around the world. Countries locked
down, businesses shut down, and supply chains were interrupted. As a result,
investors became nervous, and many started pulling their money out of riskier
currencies. The U.S. dollar, as a safe-haven currency, strengthened during this
time, while other currencies, especially those in emerging markets, weakened.
Pandemics can also create long-term
economic effects. The recovery process after a global crisis can take years,
and the currency of a country that is struggling to recover can continue to
decline. For example, the economic effects of COVID-19 are still being felt
today in many parts of the world, and the currencies of some countries have
still not fully recovered.
Natural disasters can have similar
effects. For instance, Japan’s economy is often impacted by natural disasters
like earthquakes or tsunamis. When these happen, the Japanese yen can fluctuate
as investors react to the damage. Similarly, if a major hurricane hits the
United States and causes widespread destruction, the U.S. dollar could
temporarily weaken due to the economic uncertainty.
So, when a natural disaster or a
pandemic occurs, it’s important to keep track of how it could affect the
economy and the value of a country’s currency. The effects can be both
short-term and long-term, so it’s important to stay informed.
How to Stay Prepared?
Now that we’ve covered the top
three geopolitical events that can shake up Forex markets, let’s talk about how
you can stay prepared. While you can’t control when these events happen, there
are steps you can take to protect yourself and your investments.
1. Diversify Your Investments
One of the best ways to stay
prepared for geopolitical events is to diversify your investments. By spreading
your money across different assets and currencies, you reduce the risk that any
one event will hurt you too badly. For example, instead of putting all your
money in a single currency or stock, you could invest in a mix of stocks,
bonds, and foreign currencies. This way, if one market reacts negatively to a
geopolitical event, you have other investments that might perform better.
2. Use Stop-Loss Orders
If you’re actively trading in the
Forex market, you can use something called a stop-loss order. A stop-loss order
is an automatic instruction that tells your broker to sell your currency if its
value drops below a certain point. This can help protect you from losing too
much money if a geopolitical event causes a sharp drop in the currency’s value.
3. Stay Informed
Keeping up with global news is
crucial for staying prepared. By staying informed about geopolitical events,
you can anticipate how they might affect the Forex market. Use news apps,
websites, and financial reports to stay up-to-date. The more you know about
global events, the better you’ll be at predicting currency shifts and making
smarter decisions.
4. Consider Hedging
Hedging is a strategy where you
take positions in different currencies to protect yourself against unexpected
market movements. For example, if you’re an international business owner who
deals with multiple currencies, you might use hedging to protect against
currency fluctuations caused by geopolitical events. There are several types of
hedging strategies, so it’s important to talk to a financial advisor to see if
this is right for you.
What's the Bottom Line?
Geopolitical events like wars, elections, and natural disasters have a powerful influence on Forex markets. These events can cause major shifts in the value of currencies, leading to market volatility and uncertainty. However, by staying informed, diversifying your investments, and using tools like stop-loss orders and hedging, you can be better prepared to navigate the ups and downs of the Forex market. Remember, while you can’t control what happens in the world, you can control how you respond to it.