Geopolitical and military conflicts significantly affect currency markets through several key mechanisms:
* Flight of capital to safe havens: When conflicts break out, investors tend to withdraw their investments from affected countries or those perceived to be high-risk. They seek "safe-haven currencies" such as the US dollar, the Japanese yen, and the Swiss franc, leading to increased demand for these currencies and a rise in their value. In contrast, the currencies of countries directly affected by the conflict or those perceived as less stable weaken.
* Economic uncertainty: Conflicts increase uncertainty about the economic future of the affected countries and the world at large. This ambiguity reduces investor confidence and negatively impacts foreign direct investment (FDI) flows and investments in financial portfolios, weakening the local currency.
* Impact on trade and supply chains: Conflicts disrupt global supply chains and affect international trade flows. This may lead to increased import costs (especially for oil and essential goods), which raises inflation and weakens the purchasing power of the local currency. Additionally, a decline in exports or disruption can lead to a trade balance deficit, putting pressure on the currency.
* Changes in commodity prices: Conflicts often lead to sharp fluctuations in the prices of commodities such as oil, gas, and metals. Countries that heavily rely on exporting or importing these commodities will see their currency directly affected by price changes. For example, rising oil prices support the currencies of oil-exporting countries and weaken the currencies of importing countries.
* Government interventions and monetary policy: Central banks and governments in conflict-affected countries may be compelled to take extraordinary measures to support their currency or manage the economic crisis, such as sharply raising interest rates or imposing restrictions on capital movement, which affects currency volatility.
In summary, conflicts lead to an environment of uncertainty and risks, prompting capital to seek safety, disrupting economic and commercial activities, and creating inflationary pressures, all of which are factors on which currency prices fluctuate.