7 Sneaky Ways that the War in Iraq is Influencing the Forex Markets

Heather Johnson

The ongoing conflict in Iraq has wreaked havoc on Washington politics, it has resulted in a growing rift in global opinion of the US, and it has caused American citizens immeasurable levels of personal grief. But the Iraq war has also affected those with more pragmatic concerns, such as their own financial stability. Recent American military action has had an enormous effect on the strength and stability of the Dollar. Though it goes largely unreported, the war in Iraq plays as big a role in the fluctuations of the forex markets as almost any other outside influence. An examination of these subtle pressures can help you better understand how worldly events can shape the currency markets, and maybe even help you make some money for your trouble.

1. Increases in energy costs

When any significant oil reserves are in jeopardy, it causes energy costs to skyrocket. Iraq has lots of oil, and it is undoubtedly in jeopardy. Billons of dollars in oil revenue have been lost throughout the course of the war, and no country is harder hit by this shortage than energy-hungry America. While high energy prices adversely affect all currencies, the US is a veritable oil glutton, so the Dollar has been hit particularly hard.

2. Flooding the market

Dollars are sent in big green piles to Iraq, never to return. In 2004 alone, almost 12 billion dollars were sent to Iraq and then effectively lost in the desert. The slight misplacement of these few bills has led to inflation and a weakening of the Dollar.

3. Deficit increases

The federal budget is incapable of keeping pace with the tremendously expensive war in Iraq, so the US has increasingly turned to borrowing from foreign lenders. This practice has saved the government from going broke, but it has been disastrous for the Dollar.

4. Failing public perception

Worldwide support for the war in Iraq was never very high to begin with and it has continued to wither as the conflict drags on. A currency’s value is closely tied to global opinion of its issuer, so the Dollar has faded as well.

5. Slumping numbers in the polls

Just as the Dollar can be tied to international views of the US, the strength of our currency is closely linked to how we view our current President. Investors look for a robust leader when considering Dollar-dominated assets and, at the moment, Americans don’t have much faith in their chief executive. In large part due to the unpopular war in Iraq, President Bush’s approval ratings have plummeted, and the Dollar has followed suit.

6. Avoiding the next preventative strike

As Iraq attempted to do in 2000, Syria recently converted all of its foreign currency transactions from Dollars to Euros. Syria made this move to protect its assets in case it happens to be next on Dick Cheney’s list. US law requires that any transaction conducted in Dollars pass through the US banking system, so it only makes sense for a foreign entity to remove its money from the hands of a potential enemy. This decreased use of the Dollar (and the further reduction that could result if other countries follow Syria’s lead) has had a negative affect on demand for the Dollar, driving its value further down.

7. A flagging market

The Iraq war has cost the US economy literally trillions of dollars in lost revenue from market spheres that rely on discretionary spending. There has been a marked reduction in spending on new technology, travel, and a variety of consumer goods since the inception of the Iraq war. Losses in the stock market are never good for the strength of the Dollar, and the war in Iraq is certainly not helping anyone on Wall Street.

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About the author:
Heather Johnson is a freelance finance and economics writer, as well as a regular contributor for CurrencyTrading.net, a site for currency trading and forex trading information. Heather welcomes comments and freelancing job inquiries at her email address heatherjohnson2323@gmail.com.

Published at Feb, 12 '08 ; read 230 times;

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