What are the Main Factors Impacting the Performance of the Forex Market?

By  //  December 4, 2020

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In 2019, the global foreign exchange market had an average daily trading volume of more than $6.6 trillion. This makes it, by far, the biggest and most liquid market in the world.

The US dollar is the ‘global currency’, the official world’s reserve currency, and the world’s most popular, according to the International Monetary fund.

In this article, we will take a look at the main factors that impact the performance of the forex market and, in particular, the US dollar.

Social events

Social events in the US have a huge impact on the strength of the dollar. Riots and national protests, corruption scandals, and of course, elections, all have huge sway over the markets. The recent US election sent the markets spiraling for months, peaking around the time of the vote.

When US voters went to the polls to decide between Donald Trump and Joe Biden at the start of November, it became clear how societal and economic crises impact US Presidential elections, and consequently, the forex markets. It’s hoped that Biden’s financial policies will give the dollar back some of its strength as we move into 2021.

Natural disasters

The United States has its fair share of natural disasters including hurricanes, tornados, floods, earthquakes, and of course, wildfires. All of these can have a devastating impact on the local and even the national economy.

Such events can disrupt tourism, transport, manufacturing, and agriculture as well as disrupting the lives of communities. Often, disasters require millions if not billions in aid and cleanups, which again has a direct impact on the economy.

In 2019 for example, the US was afflicted by 14 individual natural disasters including floods, storms, and cyclones. Each with billion-dollar price tags, these caused a drop in the value of the dollar.

Thankfully, the impact of these price drops tends to be short-term with rebounds occurring shortly after.

Global events

But it’s not just events in the US that can impact the value of the dollar. Global events in other leading countries can also cause the value of the dollar to increase or decrease.

Brexit for example affected the short-term stability of the dollar with its value plunging around 17% following the decision being announced.

Other examples include wars such as Iraq and Afghanistan, military campaigns, the death of a leader, or changes in government.

Business events

The world of business and institutions such as the stock market have a significant effect on the foreign exchange market and value of the dollar. Some of the biggest companies in the world are US-based.

These include Walmart, Amazon, Apple, and CVS. The top US tech companies are worth more combined than the entire European stock market.

This gives you some idea of just how powerful and influential American businesses are on markets, including forex. Many of these companies are also big employers and should any of them cut staff or go bankrupt, the unemployment rate would soar, leading to a decrease in the dollar.

Currencies and foreign exchange trading can be seen as being as deeply impacted by societal factors as they can financial ones.

From political instability to even environmental disasters, the financial building blocks of the forex market are tangibly linked to almost all global events of significance.

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