Currency affected by natural disaster

It was not too long ago when the Australian dollar (AUD) was trading above the US dollar. AUD was also strong in comparison to Singapore dollar (SGD). At its peak, AUD was equivalent to SGD $1.315 at the end of last year. Yesterday, AUD lost 1.4 per cent against SGD and it stood at SGD $1.272 as at last night.

What brought on this sudden drop in AUD? This is attributed to the current flooding disaster experienced by parts of the Queensland state and by Brisbane most recently. The flood water closed the coal mining industry in the area and inundated cotton and sugarcane farmland resulting in economic impact of reduced exports. In addition, tourism will be affected as travellers put off plans to go to Queensland.

After the flood water receded, there will be a period of clean-up of the affected areas and many homes of residents. Public spending in this regard will siphon off money that could be used in other revenue generating programmes and projects had the natural disaster not occurred.

Surely the Australian economy will be affected negatively. Traders in foreign currencies recognise this and sell Australian dollar before it falls any further. Selling Australian dollars reduces demand for this currency and therefore forces the Australian dollar to weaken.

In dealing in foreign currencies, investors are also impacted by natural disasters of the world. One day, the currency is strong and the next moment it may collapse because of a calamity affecting the country. That is in the nature of foreign currency investment and it can be volatile to the extent of incurring huge losses.

Copyright © 2011, limkimtong for Living Investment

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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