Weakest Currencies in 2020 and Severe Consequences to Expect – Chart of the Day

Brazilian currency (Pixabay)
  • Countries that are heavily exposed to the crisis have devalued their currencies in 2020 by as much as 10 to 25 percent against the dollar.
  • The devaluation of raw materials, the collapse of tourism, and the contraction of trade are the main reasons.
  • The effects on a country can be both negative and positive. The greatest danger is that a vicious circle will form.
Old Mexican peso (Pixabay.com)
Old Mexican peso (Pixabay.com)

 

 

Which Countries Are in Danger in 2020?

Crises weaken the weak more than the strong. That can be seen in the foreign exchange market. Some currencies have lost 25 percent of their value in 2020 against the U.S. dollar this year. (Like the Namibian Dollar, South African Rand, Brazilian Real.) Currencies in other larger countries, such as Mexico, Russia, Indonesia, Turkey, or Australia, also showed double-digit weakening percentages. This can affect many hundreds of millions of people. The US dollar, meanwhile, strengthened only moderately against major currencies. (The DX dollar index rose 4.5 percent this year.)

Which currencies are most affected by the phenomenon of devaluation in 2020? Primarily those that derive most of their revenue from oil or other raw materials. Such as South Africa, Brazil, Russia, Norway, or Canada. Other countries may have been on the list because they used to make a living from tourism. Or they are small and very vulnerable to international trade. Such can be Iceland, Thailand, New Zealand, Hungary. Others, because they are indebted in foreign currency. Like Turkey or Ukraine.

Chart: Changes in the dollar exchange rate in certain currencies and precious metals in 2020.
Chart: Changes in the dollar exchange rate in certain currencies in 2020, and some precious metals. (Data source: Stooq.com.)

There are many other factors. For example, possible strength or overvaluation of a particular currency before the crisis. Or the real interest rate, the inflation in that country. This year, by the way, precious metals, especially gold, have kept their value measured in the US dollar. (Also read: Are We Facing Epic Inflation, Horrific Real Interest, and Brutal Gold Price Explosion?)

7 + 1 Impact That Could Affect Billions

What could be the impact of these processes on small investors, average people, businesses in the countries concerned? What causes the devaluation of currencies in 2020?

01

 

Prepare for More Crisis in 2020

The crisis is not over. Further falling commodity prices, declining exports and tourism, and shrinking production can cause even greater economic difficulties. Unemployment is rising, and wages may fall. 

 

02

 

Devaluation Has Positive Effects

The devaluation of the currency can partially improve the situation. Exporters receive more local currency for one dollar, which increases their profitability and competitiveness. This increases the performance of the economy, the labor market situation. (This is why countries often deliberately try to devalue their currencies.) 

 

03

 

Inflation Is Coming after Devaluation

Currency devaluation has an inflationary effect. Imported products will cost more in local currency. The consumer can buy less for the same amount. The price of imported raw materials and machines can make domestic products also more expensive.

 

04

 

Debtors in Danger in 2020

In a country with falling currency, stocks, bonds, corporate shares and everything else become cheaper for foreigners. This can increase the willingness to invest, both in stock exchanges and private companies. (Although in the current situation, international investors are acting often risk-averse.) For example, stock indices measured in the national currency may rise because of this.

 

05

 

Interest Rate Hike Possible

The national bank can feel forced to take measures to protect the national currency. This is often an interest rate hike, which can slow the economy down. But it may also introduce restrictions on buying foreign currencies and investments.

 

06

 

Uncertainty Is Bad

Confidence in the national currency is declining with depreciation. Economic actors cannot plan well for their activity. Uncertainty can ruin businesses or reduce their activity.

 

07

 

Investments Are Cheaper – for Foreigners

In a country with falling currency, stocks, bonds, corporate shares and everything else become cheaper for foreigners. This can increase the willingness to invest, both in stock exchanges and private companies. (Although in the current situation, international investors are acting often risk-averse.) For example, stock indices measured in the national currency may rise because of this.

 

+1

 

The Vicious Circle

A negative spiral could start: devaluation causes more and more inflation. People, companies, flee from national currency into other currencies. They buy foreign money, gold, real estate, and other “real assets”. Rising inflation is further weakening the currency. A self-reinforcing, vicious circle could begin. This can lead to hyperinflation, or at least higher, double-digit inflation. And a general loss of confidence in the currency, so, further depreciation.

 

 

The Cure for Currency Devaluation?

Is there a cure for currency devaluation? How to protect against all this? This varies from country to country. Perhaps the best advice is not to put all your eggs in one basket. Divide your money between domestic and foreign assets, interest-bearing investments and stocks, precious metals, and real estate. We know many people work where they can. They have no choice. But whoever can do it, should choose a job that is not dependent on the crisis. For example, in a stable sector, in a strong company. Don’t keep money in an investment that doesn’t offer a positive real interest rate. Currency devaluation and inflation go hand in hand.  (Also read the following post: Eight Ways How Inflation Threatens Your Income and 13 Ways to Fight It)

Disclaimer

I’m not a certified financial advisor nor a certified financial analyst, accountant nor lawyer. The contents on my site and in my posts are for informational and entertainment purposes and reflecting my collection of data, ideas, opinions. Please, make your proper research or consult your advisors before making any investment or financial or legal decisions.

(Photos: Pixabay.com.)

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