When a country begins its Daylight Saving Time (DST), the value of their currency depreciates reducing its strength in international markets – yet when the country exits DST this depreciation is reversed, according to new research by Durham University Business School.
The depreciation is likely to be caused by a combination of the psychological impacts linked to DST, such as sleep disruption and heightened stress, which disrupts markets, and the change in market position caused by shifting time zones. When countries enter DST, their time difference with the United States – the world’s most prominent stock market – becomes larger, negatively affecting trading.
The research, conducted by Dr Michael Nower, Assistant Professor in Economics, examined the impact of DST on bilateral exchange rates. Dr Nower used Federal Reserve daily data on exchange rates from the period of 1971 to 2020, aggregated to weekly averages.
This data amounted to over 300,000 observations, focused on a range of countries that observe DST; Australia, Canada, Denmark, the Eurozone, New Zealand, Norway, Sweden, Switzerland, the United Kingdom and the United States, as well as two countries that do not observe DST: Japan and South Africa.
The research found that DST had a significant impact on countries that observe it – with their currency depreciating from the week that this begins, until the week that DST ends.
Interestingly, the US dollar was the only currency which saw minimal negative impact on its value when it entered DST. Dr Nower attributes this to the predominance of the US market and the dollar globally, with many countries adjusting their markets to align with the US market time zones.
Dr Nower also examined data on the equity markets of each country and time zone differences to examine the drivers of the DST effect. The study presented evidence of both the psychological and physiological effects of DST transition, as well as an impact of shifting time zones relative to the USA.
When DST ends, time zones return to normal, aligning better with the US market. Positive psychological effects associated with the time change also play a role in improving currency values post-DST.
“Over 1.2 billion people live in the more than 60 countries where daylight saving time is currently fully or partially observed at different times of the year,” says Dr Nower. “Our research shows that, though it is argued that it has certain societal benefits, daylight savings time has a negative impact economically for the countries that observe it – weakening their currency over the period”.
With over 70 countries which previously used to observe DST now no longer doing so, and discussions, including a vote in European Parliament to end DST across the EU, it is likely we may see less and less countries observing this in the near future.
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