Currency crises have historically led to severe economic turmoil, eroding wealth, destabilising markets, and triggering inflationary spirals. For investors (likely such as yourself), these crises highlight the vulnerabilities of relying too heavily on a single currency or economic system.

While some markets are more resilient than others, history has shown that no currency is completely immune.

This article explains how currency crises unfold and how investors can mitigate risks in today’s interconnected global economy.

What is a currency crisis?

A currency crisis occurs when a country’s currency rapidly loses value, often due to economic instability, political uncertainty, or a loss of investor confidence.

This devaluation increases the cost of imports, fuels inflation, and can lead to severe capital outflows, often in the form of ‘capital flight’, whereby investors move their money out of the country, selling local assets and converting funds into stronger currencies.

As a result, the exchange rate deteriorates further, making it harder for the country to finance imports, service foreign debt, or maintain economic stability.

Currency crises can be highly disruptive to your investments. Market volatility increases, purchasing power declines, and governments often impose restrictions on moving money across borders.

What triggers a currency crisis?

Currency crises are often a symptom than a cause, and are a reflection of deeper economic weaknesses. They can arise from a combination of factors, including:

• High levels of foreign debt
  • Countries that borrow heavily in foreign currencies struggle when their local currency weakens, making repayments more expensive.
• Political instability
  •  Uncertain leadership or sudden policy changes can lead to market uncertainty and capital flight.
• Inflation and poor monetary policy
  • Printing too much money or keeping interest rates too low can weaken confidence in a currency.
• External shocks
  • A global recession, drop in commodity prices, or financial contagion from another country can trigger a crisis.
• Trade imbalances
  • Persistent current account deficits, where a country imports more than it exports, can weaken its currency as demand for foreign currency exceeds demand for the local currency.

What can history teach us?

The impact of currency crises varies depending on the severity of the depreciation, government responses, and underlying economic conditions.

Several past examples highlight key risks and patterns about which you should be aware:

Turkey (2018-Present)

A combination of high external debt, political uncertainty, and unorthodox monetary policies led to a sharp decline in the Turkish lira. Inflation soared, the cost of imported goods increased significantly, and businesses with foreign-denominated debt faced rising repayment costs. Investors holding Turkish assets experienced considerable volatility, with capital outflows further weakening the economy.

Venezuela (2016-Present)

Economic mismanagement, including excessive money printing, led to hyperinflation and a significant decline in the value of the bolívar. As a result, the purchasing power of wages and savings declined rapidly, and foreign currency became the preferred medium for transactions. Those with investments tied to the local economy faced difficulty preserving value.

Argentina (2001 & 2018-Present)

Argentina has faced multiple currency crises, with sharp devaluations driven by debt defaults, inflation, and capital flight. Frequent shifts in monetary policy and currency controls have made it difficult for investors to predict stability, leading many to seek alternative stores of value outside the country.

Zimbabwe (2000s-Present)

Inflationary pressures, government policies, and economic instability resulted in severe currency depreciation. The Zimbabwean dollar was eventually abandoned in favour of foreign currencies to stabilise transactions. Those who had savings or investments in the local currency saw a significant reduction in real value over time.

These cases demonstrate that high inflation, excessive reliance on foreign debt, and investor confidence play a crucial role in determining a currency’s stability.

How do currency crises affect your investments?

When a currency collapses or experiences extreme volatility, investments tied to that currency can face serious challenges including:

• Loss of purchasing power
  • Inflation caused by currency depreciation reduces the real value of savings and investments. Even fixed assets like real estate can lose value in global terms.
• Stock market volatility
  • Domestic stock markets often suffer sharp declines as foreign investors withdraw capital and local companies struggle with rising costs.
• Capital controls & restrictions
  • Governments often implement measures to prevent capital outflows, making it difficult for investors to move money out of the country.

How can you protect against currency risk?

While it is impossible to predict every currency crisis, you can take steps to reduce your exposure and safeguard your wealth:

Diversify currency exposure

Holding assets in multiple currencies reduces reliance on any single economy. The Swiss franc, US dollar, British pound, and other historically stable currencies offer relative security when compared to ‘developing’ economies.

Invest in global equities

Companies operating in multiple regions generate revenue in different currencies, helping to mitigate the impact of any one local currency devaluation.

Consider currency-hedged investments

Some ETFs and investment funds offer built-in hedging to reduce the impact of exchange rate fluctuations. This can be particularly useful when dealing with currencies that are more volatile or historically less stable. However, it can come with costs and is not always a good idea.

Currency risk is an inherent part of investing, particularly during times of economic uncertainty. While these strategies can help manage exposure, the right approach will depend on individual circumstances, investment goals, and risk tolerance.

Managing currency risk in volatile markets

Currency crises can occur in any economy under financial stress, and their effects can ripple through global markets. While some currencies benefit from greater stability due to their status, no economy is entirely immune.

Managing currency risk requires careful consideration of where you invest and how you diversify. By spreading exposure across stable assets and making informed financial decisions, you can better protect your long-term wealth.

At Patterson Mills, we help clients navigate currency risks and the global world of investments with strategies unique to them. Whether you seek diversification, wealth protection, or a resilient portfolio, our team is here to assist.

If you are looking for a place to ensure your wealth is cared for, get in touch with us today to learn more about how we can service your needs.

E-mail to contactus@pattersonmills.ch or call +41 (0) 21 801 36 84 and we shall be pleased to assist you.