Ties to the world economy and the forex market

The IMF has no authority to enforce its suggestions. From this standpoint, it cannot directly impact the currency market the same way as institutions such as the U.S. Federal Reserve or the European Central Bank.

Additionally, opponents of the IMF say the organization has outlived its usefulness. While the switch in the 70s from a pegged to a floating currency system (in which currency values are allowed to fluctuate against each another) forced the IMF to change its focus, its actions can still affect the forex market.

The main way the IMF impacts the market is through its lending policies. Before the IMF will lend money to a country, it establishes a program specifying how and when the money will be paid back. Once this has been agreed upon, the IMF begins the lending process by purchasing the country’s currency — a bullish factor for the currency, depending on the size of the loan.

Generally, the IMF does not take such actions in the world’s major currencies. However, economic events in one country can affect other countries in the region — for example, a large loan to a small Asian country could be beneficial to the Japanese yen — so such actions bear monitoring. Also, the surveillance arm of the IMF conducts yearly audits of all member countries, known as “Article IVs.” While these are routine, they are closely watched, and any hint of economic trouble has the potential to send a country’s currency downward.

The World Bank’s actions function more as an indicator of possible currency appreciation. The Bank has a reasonably strong success rate in helping countries find their economic legs and function on their own.

South Korea is possibly the best evidence of this, as the World Bank — with help from the IMF helped the country dig out of its economic hole in the late 90s, creating a bullish situation for those investing in the country’s markets or currency.

One key factor to a country’s success is how long it is dependent on the World Bank. Countries with decades-long reliance on the Bank and/or IMF have typically struggled to become economically viable.

In this regard, however, India bears watching. The country has accepted loans for more than 30 years, but shows signs of financial stability. Shedding the World Bank/IMF aid may be an indication of continued future economic strength.

Although they are not primary market movers, the actions of the IMF and World Bank can provide insight regarding potential pockets of economic strength and weakness that are reflected in the currency market.