The global supply chain has been under pressure lately.
From COVID to the war in Ukraine, there have been many disruptions to how things are made, moved and sold.
Those disruptions have affected businesses and consumers in different ways but have also caused currency fluctuations.
Currency is tied to global trade and when supply chains break, it affects the value of currencies worldwide.
What is the Global Supply Chain?
Before we get into how supply chain disruptions affect currency movements, lets first understand what the supply chain is and why its so crucial.
The supply chain is the network of businesses, factories and transportation systems that work together to produce and deliver goods to consumers.
Think of the last time you bought a new phone or a car. Most of those products are made of parts from different countries.
The company that assembles the phone or car relies on parts from all over the world.
If one part doesnt arrive on time due to a disruption, it can slow down the whole process.
How Supply Chain Issues Affect Currency Movements
When there are supply chain disruptions, it affects global trade.
This can affect the value of a countrys currency because currencies are traded based on how well a country is doing in terms of exports and imports.
If supply chain issues slow down production or reduce exports, the currency will drop even at JustMarkets.
Example: COVID-19 Pandemic
The global supply chain was severely impacted during the COVID-19 pandemic.
Factories shut down, shipments were delayed and demand for certain goods (like medical supplies) went through the roof.
For example, the US dollar dropped in value against other currencies because the pandemic slowed down exports and businesses couldnt keep up with the flow of goods.
On the other hand, countries like China which recovered quickly from the pandemic and got back to production saw their currency (yuan) strengthen because they could export while others couldnt.
Currency Movements: A Deeper Dive
When a countrys economy is affected by supply chain disruptions, it impacts foreign exchange (forex) markets.
The forex market is where currencies are bought and sold. If a country cant produce or export goods as before, traders will sell off that countrys currency and the value will drop.
Heres how:
◾️ 1. Reduced Production or Export: If a country cant produce goods on time due to supply chain disruptions, exports will drop.
◾️ 2. Currency Depreciation: With less exports, theres less demand for that countrys currency. So the currency drops.
◾️ 3. Inflation: Currency depreciation means higher import costs which can cause inflation in the country.
◾️ 4. Economic Growth Slows: Less demand for exports and more expensive imports slow down the economy.
Inflation and Interest Rates
When supply chains are broken, inflation rises. Prices go up because production and transportation costs go up.
Higher interest rates attract foreign investment which makes the currency stronger.
For example the Fed in the US raised interest rates several times after the pandemic to combat inflation caused by supply chain issues.
So the US dollar went up against other currencies.
But not always. In some countries inflation gets out of control and currencies go down instead of up.
Real-World Example: The War in Ukraine
The war in Ukraine is another major supply chain disruption that affected currency movements.
Ukraine is a major exporter of wheat, oil and gas. When the war started, exports from
Ukraine were disrupted and prices of food and energy went up worldwide.
Countries that were heavily dependent on these exports saw their currencies go down.
At the same time the US dollar being a safe haven currency went up as investors ran to it during times of global uncertainty.
The euro went down as the European Union faced high energy prices and decrease in trade.
How Businesses and Investors Can Minimize Risks
Market players such as businessmen and investors can follow measures that will help them refrain from innominate impact from the volatility of supply chain disruptions on currency value.
Here are a few tips:
Diversify Markets
This is the view that business risks should not be concentrated in one area of operation.
They should buy from a number of countries so as to be able to avoid being exploited by disturbances in one country.
Hedge Currency Risks
Forward contracts can be used to financially hedge exchange risks in the future as companies buy them at a fixed rate every month.
This will assist them in managing against the loss from any arbitrary movements of the currencies.
Invest in Foreign Assets
Various stocks or other foreign currencies which are owned by investors will be able to shield them from depreciation of domestic currency.
It can be done by local companies borrowing from overseas or purchase of overseas bonds or stocks.
Conclusion
Supply chain disruptions affect currency movements globally.
Currencies go down but this depends on the country and its trade partners.
In short supply chain disruptions affect businesses and consumers and currency markets too.
