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Part III. Fundamental Analysis / Chapter 1: Forex Reaction to Political Instability
Political events of global significance typically have an immediate impact on the international foreign exchange market, known as Forex. While these events may not be directly related to currency operations, the psychological sentiment of market participants leaves its mark on the currency quotes. The US dollar is currently the primary global reserve currency, and therefore, events affecting American political figures or US military operations can influence the balance of supply and demand for the US currency, thus affecting virtually all currency pairs traded on the Forex market.
On July 19, 1990, the Iraqi army invaded Kuwait, triggering the Gulf Crisis. In response, the U.S. military command decided to initiate the Gulf War. On January 17, 1991, Operation Desert Storm began. As part of the operation, the coalition forces commenced missile and bombing strikes against the Iraqi army. The Forex market reacted to these events with a strengthening of the U.S. dollar exchange rate. On February 24, the ground phase of the operation commenced, and on February 27, the Iraqi army was defeated, and Kuwait was liberated. The Forex market responded with an even stronger appreciation of the U.S. dollar against other currencies.
The events of August 19, 1991, marked the collapse of the Soviet Union and are recorded in history as the "August Coup." At the time, the USSR was Germany's largest debtor, so on the Forex market, the German Mark plummeted on that day. However, once the debts were recognized by Russia, the exchange rate of the German Mark returned to its previous positions.
On October 30, 1998, NATO air forces began reconnaissance flights over Kosovo. On November 13, 1998, NATO decided to deploy troops in Macedonia to assist OSCE observers in Kosovo if necessary. During this period, the U.S. dollar exchange rate noticeably increased in the Forex market. On March 24, 1999, NATO launched the first phase of the Allied Force operation, conducting strategic bombings in Serbia and Montenegro. As a result, Belgrade severed diplomatic relations with key NATO countries, including the United States, Germany, France, and the United Kingdom. On June 9, 1999, an agreement was signed between Serbian and NATO forces at the border of Yugoslavia and Macedonia, and on June 10, 1999, the NATO Secretary-General issued an order to suspend the bombings. The UN Security Council adopted a resolution on ensuring international security presence in Kosovo. All these events were accompanied by a strong strengthening of the U.S. dollar exchange rate in the Forex market.
The events surrounding the scandal of then-President Bill Clinton's sexual relationship with intern Monica Lewinsky in 1998-1999 also had an impact on the Forex market. On November 19, 1998, the House of Representatives considered the charges against Bill Clinton, including perjury and other allegations. Two charges were supported and sent for consideration to the Senate Judiciary Committee, which took place on January 7, 1999. Thus, the question of presidential impeachment was on the agenda. Due to uncertainty about who would become the new president and the future policies of the United States, the dollar sharply declined in the Forex market. The Senate rejected the charges on both counts, allowing Bill Clinton to remain in the presidential office. However, discussions about the love affairs of the American president continued worldwide for a long time.
On May 12, 1999, news of the resignation of Russian Prime Minister Yevgeny Primakov was announced, highlighting political instability in Russia. As a result, the Euro exchange rate against the US dollar significantly declined in the Forex market. Shortly after, news broke that US Treasury Secretary Robert Rubin had resigned, indicating instability in the US financial system. The Forex market reacted to this by a reverse increase in the Euro exchange rate against the US dollar, i.e., a decline in the American dollar.
On September 11, 2001, the world was shaken by a terrorist attack in the United States, claiming thousands of lives. Immediately after the terrorist act, the US dollar exchange rate sharply declined in the Forex market. Trading was suspended the next day, which was declared a non-working day in the US. Over the next few days, the market consolidated.
On August 15, 2003, after the official closing of trading in the US, major power failures occurred due to human errors at large power stations in the US and Canada, leaving major cities in both countries virtually without electricity. Initially, while the possibility of a terrorist attack was being considered, the US dollar exchange rate against the Euro in the Forex market dropped by almost 100 pips. However, after the situation was resolved, it returned to its previous level.
On March 21, 2003, the war in Iraq began. Initially, the expectation that the military operation of the anti-Iraq coalition forces would proceed as planned had a positive impact on the US dollar exchange rate in the Forex market. The publication of inflation data in the US also had a positive effect on the dollar exchange rate. However, further events in March led to a decline in the value of the American dollar. Analysts attributed this decline to market concerns that the coalition's military presence in Iraq might last longer than anticipated, which would increase the US government's expenses for maintaining the army. Reports of US military casualties and intensified combat also had a negative impact on the dollar exchange rate. However, when reports emerged on April 3, 2003, in the US media that coalition forces were just a few kilometers away from Baghdad, there was hope for a possible swift end to the military campaign in Iraq, resulting in the stabilization of the dollar exchange rate in the Forex market.
On February 20, 2004, the US dollar exchange rate against the Japanese yen rose by nearly 250 pips. Analysts attributed the sharp decline in the yen to the Japanese government raising the security readiness level to the maximum due to explosions near the Ministry of Defense building. Many interpreted these explosions as a protest against the deployment of Japanese troops in Iraq.
As we can see, the Forex market is a very sensitive mechanism and reacts to all events of political instability worldwide. This is not surprising, as such events are closely linked to the global economy and its future development. They instantly spread around the world through mass media. Being aware of global events is an essential part of Forex trading for any professional trader. Therefore, if you don't want to be caught off guard, stay informed with the news!