How Natural Disasters Affect Currency Exchange Rates

Catastrophes are well known to have large effects on exchange rates because they influence all elements of economies. These include earthquakes, hurricanes, floods, tsunamis, affect trade, cause severe damages thus economic immobility. For this reason, exchange rates can be influenced since many countries are still in the process of repairing the damages wrought by such occurrences.

Volatility in currency exchange rates, according to the literature, is inevitable generally and particularly where natural disasters cause disruption of trade. In a natural calamity, the ports, airports, and trading routes can be wrecked or closed for operations. This can result to a fall in the exportation couple with a similar fate of importation hence affecting the economy. Consequently, the demand for a country’s currency may diminish as its exports, therefore, alters the exchange rate. For instance, when Hurricane Maria happened in Puerto Rico in 2017, the overall economic system disrupted and affected exchange rates.

Image Source: Pixabay

They also cause significant losses to property and assets, leading to fluctuations in exchange rates. Reconstruction and rehabilitation of damaged structures and system like building, roads, bridges, and power systems are also costly. Where the government requires funds to finance these repairs they will have to borrow: this may result in an increase in interest rates as well as fluctuations in the country’s currency exchange rate. The cost of reconstruction could also come at a cost where there are large deficits, in what might lead to a depreciation of their currencies.

Besides, natural disasters bring about social unrest, leading to economic issues and the destabilization of economies in particular countries or even globally. Sometimes, when so much has been lost, there is a slow and often painful process of consolidation which leads to slowed down economic growth and actual recession. This cyclical variation can lead to; alteration of the risk appetite which results in capital flight, or change in FDI due to perceived adverse changes in policy among others. It can also affect the exchange rates of the country since investors may opt to invest in other countries that have a good economic indicator.

Moreover, there are influences from the natural disasters with regard to the forex trading affects the exchange rate in equal measure. When a natural disaster occurs, the traders may make changes on their investments which makes the volatility of the currency markets go up. Forex trading involves high risk, as exchange rates change frequently due to high levels of uncertainty. This can lead to significant losses for traders. Businessmen also use the fluctuation of exchange rates to guess possible changes that can further contribute to the instability of the exchange rates of currencies.

Therefore, natural disasters remain influential on currency exchange rates because they affect the economy. Any occurrence of such events is likely to delay trading activities, lead to loss of property and spiking of inflation levels. The forex trading market plays an integral part in the change of exchanges rates and the decisions of traders can further affect the volatile nature of the forex market. This evidence underscores the need for countries to adopt suitable measures of controlling the impacts of natural disasters on the economy, as they often influence exchange rates and economic stability.