Introduction
Trade war is a situation where countries impose tariffs and other trade barriers on each other. These actions have a direct impact on the foreign exchange market. This article explores the effects of trade war on the foreign exchange market, how it affects individual currencies and whether the impact is significant.
Impact on the Foreign Exchange Market
One of the most significant impacts of trade war on the foreign exchange market is the increase in volatility. This volatility is because of the uncertainty caused by trade war. When a country imposes tariffs on another, it becomes difficult to predict the effect of the tariffs on the other country's currency.
Another impact is the decline in international trade. This decline is because of the tariffs imposed on goods and services of one country by another. A decrease in international trade means there is a decrease in the demand for the currency of the affected country. This decrease in demand causes a depreciation of the currency.
Affected Currencies
The currencies most influenced by trade wars are those of countries that are heavily dependent on international trade. Countries such as China and the United States of America are two such countries. For example, when the United States of America increases tariffs on goods imported from China, the Chinese currency (Yuan) depreciates. Similarly, when China imposes tariffs on goods imported from the United States of America, the value of the US dollar decreases.
Another example is the impact of the Brexit negotiations on the value of the British Pound. During the negotiations, the uncertainty about the future of the United Kingdom (UK) caused a decline in the demand for the British Pound, resulting in a depreciation of the currency.
Extent of the Impact
The extent of the impact of trade war on the foreign exchange market varies from country to country. The currencies that experience the most significant impact are those of countries that are heavily dependent on international trade. Countries that are less dependent on international trade may experience a minimal impact.
The magnitude of the impact also depends on the severity of the trade barriers imposed. When the tariffs are not severe, the impact on the foreign exchange market may not be significant. Conversely, when tariffs are severe, the effect on the foreign exchange market may be significant.
Conclusion
Trade war has a direct impact on the foreign exchange market. The level of impact varies depending on the severity of trade barriers imposed and the degree of dependence on international trade. Currencies of countries heavily reliant on international trade are the most affected. However, the impact is not significant for countries that are less reliant on international trade. The foreign exchange market remains vulnerable to the uncertainty and unpredictability resulting from trade wars.