How Natural Disasters Affect Currency

by UFX Markets

The death tolls caused by some recent natural disasters are horrifying. The number of deaths is always the most apparent, dizzying statistic that comes out of the damage caused by earthquakes and other types of disasters, however all kinds of consequences affect the victims’ country after a disaster strikes.

Another detrimental aspect of natural disasters is the major financial difficulty they leave behind. Throughout history, natural disasters have caused depreciation (and even appreciation) of currency because of a jolted economy.

If you take part in Forex currency trading online, then it’s imperative that you learn how to leverage your investments in uncertain times.

General Currency Effects

Usually, currencies weaken right after a natural disaster because of uncertainty about how much economic damage was actually done, according to Barclays Wealth. However, currencies can strengthen again once other countries start funding relief efforts, but the currency can then weaken once internal banks try to alleviate economic hardship (by doing things like lowering the world interest rates).

It all depends on the specific country’s situation, so there are a number of different scenarios. The following examples illustrate what has happened in the last decade.

Earthquake and Tsunami in Japan – Yen

Japan recently suffered two major blows when it was hit by an 8.9-magnitute earthquake followed by a massive tsunami. According to Businessweek.com, the Japanese currency fell right after the disasters, weakening up to 0.4% against the dollar. However, the Yen generally benefits from the uncertainty natural disasters leave behind, and repatriation (when assets overseas are turned back into Yen) could strengthen the currency.

The Yen did end up faring well and actually strengthened dramatically, and other than repatriation being a possibility, an Investopedia article suggests another reason could be that the Japanese “might have to liquidate part of their large non-Yen denominated investment portfolio to fund relief and reconstruction efforts in Japan.”

Regardless of the reason, in August of 2011, Japan tried to combat the surging strength of its currency that hadn’t weakened much since the disasters in March.  According to Reuters, Japan had been warned that the Yen was so appreciated that it could possibly hinder Japan’s recovery efforts.  As a result, Japan sold 1 trillion Yen and got the Yen down to 80.20 per US Dollar from 77.10.

Earthquake in Haiti – Gourde

The Haitian Gourde experienced a surge right after Port-Au-Prince was hit with a 7.0-magnitude earthquake in January 2010. According to The New York Times, Haiti’s currency strengthened by more than 25%, and for some purchases, the rate would be about 30 Gourdes to the Dollar. There are a couple of explanations for this appreciation.

One, which comes from the same New York Times article and suggested by a former governor of the Central Bank, is that the decrease in oil imports was keeping more money in Haiti, thus preventing any drastic appreciation. Another contributing factor was reported by a different New York Times article a couple of months after the disaster, which mentions how an increase in money from abroad helped the Gourde resist depreciation.

Earthquake in New Zealand – New Zealand Dollar

In February 2011, a 6.3-magnitute earthquake impacting New Zealand killed at least 75 people and left the economy struggling. Following the disaster, the New Zealand dollar (nicknamed “the kiwi”) fell about 2% against the U.S. Dollar, according to CNBC. Bloomberg reported that at one point, the kiwi fell to 74.55 U.S. cents, which was its lowest level since late December. As can be seen, New Zealand didn’t experience an immediate strengthening of the currency that some other countries did after a natural disaster.

In fact, early and mid-March didn’t bring much relief, as the country was still lowering its main interest rate to fight the economic problems it was facing. Late March did indicate some better signs for the currency, when it starting gaining due to the possibility of a construction boom. This could point to the potential that circulating more money within a country has for its currency.

Conclusion

It’s probably safe to say that every natural disaster has an effect not only on a nation’s general economy, but also on its currency.  This influence doesn’t just impact the specific country’s currency, either — other countries tend to feel the effects, as currencies’ strength is measured against one another. Countries around the world have experienced similar phenomena, and they will continue occurring as long as there are major jolts to countries’ economies.

Disclosure: This article is sponsored byUFX Markets as a public service. UFX Markets provides trading services in the EU and other parts of the world and is compliant with major religious and cultural standards. At the present time UFX Markets does not provide services to citizens of the United States.