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This Forex currency could collapse if the Middle East war spreads

This Forex currency could collapse if the Middle East war spreads

In recent days, the conflict in the Middle East has taken a distressing turn, with the Gaza Strip witnessing a substantial rise in casualties, including reports of devastating explosions at a hospital and, more recently, at Saint Porphyrius, Gaza’s oldest church. 

The intensifying crisis and risks of a potential broader war have sent shockwaves through global markets, affecting commodities, gold, stocks, and the foreign exchange market (Forex). 

In the realm of Forex, analysts are keeping a close eye on the Lebanese pound (LBP) in particular, as its value may bear the brunt of further regional destabilization.

Why is the Lebanese pound at risk?

As the death toll in the Middle East continued to increase in recent days, fears have grown that the current war could spill into the entire region. 

That said, one of the countries that is most likely to get involved if that happens is Lebanon. The nation’s militant group Hezbollah already exchanged gunfire with Israeli forces this week, resulting in five deaths. 

Moreover, Lebanon’s Middle East Airlines has moved five of its planes to Turkey in the event of further escalation. 

According to analysts and economists, the spillover of the current clash into Lebanon would have catastrophic consequences for the nation’s economy, and thereby, its national currency LBP. 

“The economic situation and all the indicators will rapidly deteriorate as a result of the security crisis and the Hamas-Israel war which can spill over into Lebanon.”

– Nasser Saidi, a former economy minister and vice-governor of Lebanon’s central bank, told The National.

Lebanon is already grappling with a severe economic crisis after defaulting on roughly $31 billion worth of Eurobonds in March 2020 and a significant crunch in its banking sector. 

USD rises to over against LBP

If Lebanon gets involved in the Israel-Hamas clash, the West Asian nation would face extreme challenges to pay for the damage the war would inflict. The central bank’s Forex reserves currently sit at $7 billion, down from $30 billion in 2018. 

The Lebanese pound is already feeling the pressure of the growing tensions, with the US dollar (USD) rising from 14,995 to 15,027 LBP on October 20. 

USD/LBP chart on October 20. Source: Google Finance

Lebanon’s potential involvement in the war would certainly cause further damage. 

“Various rates set by the BdL [Banque du Liban] have been realigned multiple times in 2023 alone, although the official peg has been left at 15,000 Lebanese pounds to the US dollar since a belated devaluation from 1,507.5 Lebanese pounds in February 2023.”

– said Pat Thaker, regional director for Middle East and Africa at the Economic Intelligence Unit.

While there has been a relatively stable exchange rate since the middle of 2023, Thaker anticipates that these various parallel rates may face sporadic challenges due to the persistent political turmoil.

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