A currency crisis is essentially a situation where there is excessive doubt as to whether or not the balance of a country’s domestic monetary assets is adequate to keep that country’s exchange rate fixed rate within that country’s borders. The crisis itself is typically accompanied by an equally massive speculative attack on the foreign currency market. When this happens, it can create immense strain on a country’s monetary policy, causing it to seek assistance from international sources in an effort to reverse course and stabilize its own financial condition. And it can cause that intervention to come from several different directions, including the central bank of a country, various government ministries, and even private entities acting on behalf of a country.
Many different explanations have been offered for the causes of these currency crises. Many have cited a decline in global economic activity as a primary cause. Some more cynical people have blamed a lack of long-term investment in the upkeep and development of the nation’s infrastructure, noting that this same problem seems to be playing out over the United States. A more likely explanation, however, is the dramatic decline in the number of total global investment dollars available for consumption and distribution among developed nations. While all of these situations are contributing to the current crisis, it would be impossible to isolate any one factor for being the principal cause of the current crisis.
Other analysts have suggested that investors have become increasingly uncertain regarding the political and economic stability of a country due to the widespread chaos that currently permeates parts of the Middle East and North Africa. In response to these worries, large numbers of private investors have been pulling out of money markets around the world, a trend that is expected to continue to grow. While many have speculated as to the reasons behind this sudden withdrawal of funds from non-English speaking countries, the most common excuse put forth as to why investors have suddenly and unexpectedly pulled out of the markets is the current state of the forex markets. In short, the argument goes something like this – investors have become convinced that even though the rates may appear to be healthy, they are ill-confident about the long-term sustainability of these currencies.
In order to understand how the recent currency crisis affects you as a foreign investor, it’s important to understand the nature of currency markets themselves. These are markets where foreign currencies are traded, with one currency being purchased at one point and sold back at another according to its value at that particular moment. When a country has a currency crisis, then it means that the value of that particular currency is fluctuating, most notably due to factors beyond its control.
In these cases, the governments of the affected countries resort to interventions in the form of interest rate increases, lower interest rates, or other forms of intervention to try and stabilize the markets. Naturally, this doesn’t work because it attempts to manipulate the supply of money within the economy, which in turn, artificially increases the supply. The result of this type of intervention is always a higher price for the imported currency – meaning that for every unit of currency that you purchase, more units are manufactured in order to make up the difference. In the case of the recent currency crisis, the supply of the Swiss franc was increased by the Central Bank of Swiss in an attempt to curb the inflation of the Swiss economy, which had been increasing steadily without any real controls from the government.
Naturally, when this doesn’t work, the central bank of a nation has to worry about the overall value of the national currency – which happens to be the cause of much of the current turbulence in international trade relations. The recent currency crisis has seen the Swiss government taking a harsh stance with their currency, cutting their interest rate to negative interest rates and possibly doing a bit of currency devaluation as well in order to try and regain competitiveness. While there are many theories as to what has led to this move, it’s worth noting that devaluation has typically been done as a response to a similar stimulus program; meaning that the recent devaluation in the Swiss franc was primarily the result of an economic collapse in Greece.