The short answer is no, they cannot. There are severe sanctions on North Korea and it is very tough for the totalitarian regime in Pyongyang to move money around which is why the infamous suitcases of cash have become the primary means for financial transactions. Therefore North Korea does not possess the infrastructure and market access in order to derail forex markets.

The long answer is maybe they can have an indirect impact on at least a few currency pairs, especially in the region. The good news is that those currency pairs are not highly traded and therefore most of the forex market will not feel any impact. There is no direct impact on the currency market from North Korea.

Tensions on the Korean peninsula have heightened over the past few months and the new UN sanctions imposed on North Korea on March 7th which was a direct response to their third nuclear test which North Korea conducted amidst heavy global criticism in February. The regime was angered and on top of that the South Korean-U.S. annual joint military exercise caused more tension than usual. North Korea cut off a key military hotline between the two Koreas.

Neither side will launch a war, but should there be an incident we may see the situation escalate. The U.S. Air Force dispatched two B-2 Spirit Bombers in order to join the military drill in South Korea which some experts claim it was to send a clear message to North Korean and even China. It is unclear where the U.S. got the idea from that two bombers would send a message of strength; if anything it confirms the lack of resources by the U.S. military and North Korea as well as the rest of the world is fully aware of it.

How can North Korea indirectly impact currency pairs?

• An escalating conflict may harm battered economies even further which will pose an increased drag on the global economy.
• Any U.S. involvement will further devalue the USD and every forex pair associated with the USD, either as a base currency or quote currency, will be affected.
• U.S. interference in the region could increase tensions between the U.S. and China and spill over into economic issues which would be felt in forex markets.
• Japan may suffer the most behind South Korea and forex pairs associated with the Japanese Yen will be impacted by a war on the Korean Peninsula.

In direct response to the dispatch of two B-2 Spirit Bombers, North Korean leader Kim put his Rocket Force on standby and vowed it is time to settle scores with the U.S. as well as South Korea. Forex traders outside of the region pay little attention to this hotspot for now as they are busy with the Eurozone debt contagion as well as issues in the U.S.

In case the situation will escalate, forex traders will take notice and we may see an increase in volatility in regional currency pairs as well as several major forex pairs which could fall victim to collateral damage. An escalation of the conflict may cause institutional market participants to make adjustments to their currency portfolios as well as forex strategies for the region.