New research conducted by Durham University Business School has shown that countries adopting Daylight Saving Time (DST) experience depreciation in the value of their currencies when DST begins. However, this depreciation is reversed once DST ends, stabilizing currency values in international markets.
The Impact of DST on Currency Strength
The study, led by Dr. Michael Nower, Assistant Professor in Economics at Durham University Business School, highlights a significant link between DST and currency fluctuations. According to the findings, when a country enters DST, its currency weakens in value. This trend is likely driven by both psychological and market-related factors that arise from changing time zones and disruptions to sleep patterns.
Dr. Nower suggests that market participants may experience increased stress and disrupted decision-making due to the shift in their schedules, which can have a broader effect on trading and investment activities. Moreover, the adjustment of time zones in relation to the United States—home to the world’s largest stock market creates trading difficulties, further impacting currency values.
Data and Research Findings
Dr. Nower’s research is based on over 300,000 observations from daily Federal Reserve exchange rate data between 1971 and 2020, aggregated into weekly averages. The study focused on countries that observe DST, such as the United Kingdom, Canada, the Eurozone, Australia, and New Zealand, alongside two countries that do not observe DST: Japan and South Africa.
The data reveals that countries adopting DST experience a consistent depreciation in their currencies from the first week of DST until the week it ends. In contrast, countries like Japan and South Africa, which do not observe DST, saw no significant impact on their currency values.
Interestingly, the US dollar was less affected by DST, likely due to the dominant role of the US economy in global markets. Countries trading with the US must adapt their market activities around US time zones, limiting the dollar’s exposure to the same DST-related disruptions that impact other currencies.
Psychological and Physiological Effects of DST
Dr. Nower’s analysis also delves into the psychological and physiological impacts of DST on financial markets. He found that the transition to DST tends to disrupt individuals’ sleep patterns and increase stress levels, which can impair decision-making and market participation. These effects, when combined with the market challenges posed by time zone changes, likely contribute to the depreciation of currencies in countries observing DST.
When DST ends, market participants return to their regular schedules, and the time difference with the US narrows. The psychological relief from longer daylight hours and the normalization of trading times helps reverse the currency depreciation experienced during DST.
Global Observations and Future Implications
“Over 1.2 billion people live in countries that observe Daylight Saving Time at different points throughout the year,” said Dr. Nower. “While it is often argued that DST has some societal benefits, such as energy savings, our research shows that it creates an economic disadvantage by weakening the value of a nation’s currency during the DST period.”
The findings of this study come at a time when several nations are reconsidering the use of DST. More than 70 countries have already discontinued DST in recent years, and the European Union has even discussed abolishing it across the EU.
As debates about the future of DST continue, Dr. Nower’s research provides fresh insight into the broader economic consequences of this long-standing practice.
