Basic Currencies Prices Spike and Economic Crisis

The currency market, also known as the forex exchange is by far the biggest and fastest growing investment market in the world. This growth has mainly been driven by the fact that as opposed to previous years when most of the trading volumes were generated by professional traders, today, retail traders have also gotten into the market due to the improvement of the platform for currency trading.

In the world currencies market, there are 8 basic currencies which account for the majority of the trade therein. These are:

• United States Dollar
• United Kingdom Pound Sterling
• Japanese Yen
• Eurozone ( including France, Spain, Germany and Italy) Euro
• Swiss Franc
• Australian Dollar
• Canadian Dollar
• New Zealand Dollar

As a result of this, the changes on one of these major currencies will directly affect the others. The market forces that affect one will have an impact on the rest. This interrelation is most evident when there are price spikes which more often than not result in widespread economic crises. In this article, we delve into some of the aspects with regard to these currencies’ price spikes and economic crises.

The Causes of Currency Price Spikes

The spike in currency prices is two sided: It can either be an increase or a decrease in the price. It is determined by the market forces of demand and supply.

For instance, when the demand for the dollar is high but the amount in the market cannot meet this demand, its price spikes up. On the other hand, an excess supply of the currency leads to downward spikes.

How Price Spikes are prevented

Financial institutions- national and regional central banks, are the major players in preventing sudden currency price spikes so as to maintain a stable exchange rate that only fluctuates by very minute pips.

They achieve this by ensuring that the supply of currency in the market is neither too much nor too little, thus ensuring that forex agents charge reasonable amounts for currency buyers.

Also, some of these financial institutions create caps on the said currencies, so as to ensure that they are traded at fixed exchange rates.

How Price Spikes Cause Economic Crises

One of the biggest contributors to economic crises is a spike in the price of the basic currencies. This is because when the price of a currency spikes downwards, it is exchanged at a lower rate with the other currencies, thus affecting the value of items traded using them.

 For instance, one of the most recent occurrences that sent shockwaves across the global economy was the removal of the cap on the Swiss Franc by the countries’ Central Bank. Its price dropped to record lows that had never been seen in more than two decades.

This not only affected the Swiss and European economies negatively but also the world economy in general. A case in this point is how the Swiss manufacturers suffered huge marginal loss since the value of the products they had already exported were sold at lower prices than they had been set at.