_ Political Impact Relative to the Iraqi Dinar – Analysis by Neo
First The Basics:
Political stability is the first key factor which impacts demand. If a country is in the midst of a civil war, then its currency will become devalued, due to a large supply with no global demand.
After all, who would want to buy currency which may become worthless in the near future?
If there is political uncertainty across the world, then investors will exchange speculative currencies for a “safe haven” currency, such as the United States dollar, which is well protected from political turmoil. In this case, strong demand and a limited supply will increase the value of the U.S. dollar in international markets.
According to the “Investors Guide” relating to The Basics of Currency Fluctuations, “economic stability is another factor which affects demand. During the 2008-2009 financial crises, the U.S. dollar, a safe haven currency, was no longer safe, and investors exchanged their U.S. dollar for British pounds and Euros. As a result, the U.S. dollar plunged relative to those currencies.
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_ In 2010, when European economies began to fail, the U.S. dollar rose again as the pound and Euro fell. Foreign investors divesting from a country’s companies due to the perceived weakness of the national economy can also sink a currency.
Investors are another major factor impacting currency prices. Professional investors in the foreign exchange (Forex) markets move currencies in volumes as high as stock markets.
Unlike high-frequency stock market trading, which requires active participation by the trader, automated algorithm-based programs also exist which execute Forex trades by the thousands daily around the clock. In addition, large mutual and hedge funds often use foreign currencies to hedge its other investments, and large moves by these institutional investors can cause significant currency fluctuation.”
According to the experts, even if you do not invest directly in foreign currencies like the dinar, it is important to understand how they impact equities. Some investors recommend investing in international companies which have no exposure to the U.S. dollar, especially in the BRIC markets, (Brazil, Russia, India and China) to take advantage of the growth of a foreign economy and its currency.
A well-diversified portfolio should have purely domestic, partially domestic and international stocks to limit the impact of currency fluctuations. Iraqi dinar in my opinion is an excellent addition as a portfolio addition to be well rounded.Conclusion:
The political unrest that has swept through the Middle East has had a negative effect on area currencies, as the economies of the nations who have experienced turmoil have declined sharply. Just look at Syria which is one of the nations that has experienced a decline in economic activity, and in turn a sharp decrease in the value of its currency!
The Iran situation is now an indicator to be mindful of as oil demand became the major issue as markets considered the direction of crude prices. The issue is now more one of supply as political problems trump most other forces that make crude prices move.
The distrust and bad blood between the religious sects in Iraq predates oil discovery and is not likely to be solved with oil money as we have all seen with this investment. So where does all this leave us as investors in a foreign currency?
IMO when a country like Iraq is in the midst of economic and political reform no matter how scary, this is the type of investment that given the risks, has the greatest potential to bust or pay off big time depending on their resolve to move forward and overcome these political issues with Maliki and his political foes.
Keep the faith were almost there!!!
Great info, Neo. I do have a question for you. Basically, what is your opinion on the dinar sales recently? There are varying opinions, mostly positive, on what Shababi appears to be doing. Why is he removing dinar? What is going on with the varying values of dinar, etc......thanks for your input....as always... Kelpie
Thanks Kelpi for your question, In response I would say that the CBI has control of the money supply, inflation, and/or interest rates and often has official or unofficial target rates for their currencies, as evidenced by the currency auctions by Shabibi.
To answer your question on my opinion of the dinar sales, I would have to say that there’s no way to predict with any certainty how price movements will develop in such relatively illiquid periods, and that's the ultimate point in terms of risk.
The bottom line is that if you maintain a position in the market during periods of thin liquidity, you're exposed to an increased risk of more volatile price action. With that being said, the other thing to consider is that in this “closed market” environment, the demand for dollars in the local economy is in no way jeopardizing the use their often substantial foreign exchange reserves to stabilize the market.
When that time comes when open market forces come into play, typically the Central Bank of any country will execute what is called foreign-currency liquidity swap lines. Swap lines are typically authorized as a contingency measure, so that central banks can offer liquidity in foreign currencies if market conditions warrant such actions.
You might want to Google it to see how the dynamics of liquidity to currency reserve ratios are used to manage monetary policy but again I believe the rational is twofold. One, is to absorb as much of the large denoms from the local markets as we have discussed many times and secondly maintain a trusted trade currency that will maintain or manage their fiscal framework leading up to the introduction of the new bills and revised exchange rate we have been waiting for.