The news of currency issues (or in some cases, disasters) has been everywhere lately, but it has primarily focused on three countries and their associated currencies: Turkey and the Lira, Venezuela and the Bolivar, and UK’s Pound Sterling. Let’s break them down, one by one.
Right now, the pound is trading at $1.28 USD, which is only a few cents away from the historic lows seen at the end of 2016 and early 2017. This is due almost entirely to a single issue: Brexit. Currency traders are concerned about the very real possibility that the UK will exit the EU without a deal in place to establish trade relations (amongst many other items on the table, such as borders). The closer the Brexit gets without a deal, the more likely it is that the pound will continue its downward trend.
The ongoing feud between Turkey and the United States is a complicated discussion on its own, but the reality is that Donald Trump and Turkish president Recep Tayyip Erdogan aren’t exactly pals, and it only seems to be getting worse. That may not be the root cause of the Lira’s 37% fall this year alone, but it sure isn’t helping, and last week’s crash confirmed that this crisis isn’t going away anytime soon. At its heart is a construction boom funded almost entirely by foreign currency. The quick rise in construction material costs paired with the lower-than-expected demand from foreign buyers has taken a massive toll, and now looks like it may take down the entire Turkish economy. Donald Trump might have just given it the final nudge.
The economic disaster in Venezuela has become a humanitarian one, with millions fleeing the country that can no longer provide basic needs (food, medicine) to its population. Financial mismanagement and ludicrous government policy has turned one of the richest South American countries to a disaster zone in the course of only several years. Inflation of the Bolivar could exceed 1,000,000% this year. The story of the collapse of Venezuela will be taught in University economics classes and analyzed for decades to come. This one is unprecedented, and it seems like it’s only going to get worse. The latest move from the government was to lop off 5 zeros from the end of the currency and make new notes, now called the Sovereign Bolivar. To further complicate things, they’ve pegged the Sovereign Bolivar to a new cryptocurrency called the Petro, which is itself tied to oil (apparently). The petro has been labeled a scam by cryptocurrency experts, which means that this attempt at reform is nothing more than smoke and mirrors, and certain to fail.
It doesn’t just stop with the above three. The Argentine Peso is way down, and so is the South African Rand, among others. The fear is that we could be witnessing a domino effect that will cause a global financial crisis, and experts are pointing to the U.S. treasury yield being flatter than it’s been in 10 years, (which is often an accurate predictor of recession). We don’t know yet if the recent currency collapses will be enough to trigger a global crash, but one thing is certain: the global economy is tenuous, at best.