The political choices that have moved the value of currencies in the world
The Value of Politics
When it comes to factors influencing international currency rates, political influence is high on the list. In reality, political events are one of the most powerful impacts on foreign exchange, with the ability to instantly affect currency value. So, how and why does politics affect currency rates?
Political Factors Influencing Currency
Many political factors affect the value of money and the economy. Here, we explore three aspects and precisely why they impact currency rates.
Political Stability – Countries with a low risk of political uncertainty are more appealing to international investors. As a result, political stability enhances the demand for a country’s currency and significantly impacts forex prices. Protests, coops, and political upheaval, on the other hand, destabilize the economy and undermine the local currency. This diminishes demand for the corresponding home currency and raises the risk associated with holding it.
Elections – A political election, which occurs in practically every country, can significantly impact a country’s currency. Those active in foreign exchange trading may consider elections as a single instance of potential political instability and uncertainty, which often translates into more volatility in the value of a country’s currency. However, in most cases, forex traders would monitor pre-election polls to get an idea of what to expect and see if any changes are in store. That’s because a change in government can result in a shift in citizens’ ideologies, which usually translates into a new approach to monetary or fiscal policy, both of which are important determinants of a currency’s value.
Political Conflict – Conflict-affected areas can have complex security, political, and economic contexts. Financial markets can be weakened by capital flight and inflation, while fluctuating financial flows and declining money demand can exert pressure on exchange rates.
Political Decisions That Have Affected Currency Rates
Many political decisions have affected currency rates, from political structural changes to war and trading conflicts. However, we will focus our attention on a few decisions that have happened in recent years which have shocked the currency world.
Brexit – Brexit has been one of the fundamental factors driving exchange rate volatility and the pound’s value against other major currencies over the last five years. The impact of Brexit was most visible immediately following the vote outcome when the sterling witnessed its most significant single-day drop in 30 years. This was mainly due to financial institutions selling the pound in anticipation of growing trade frictions between the UK and its largest trade partner, as well as heightened uncertainty and prolonged political instability. As more businesses sold sterling-denominated assets, the pound’s value fell in relation to other currencies.
Foreign products, services, and investments become more expensive for UK residents as the pound’s value falls. As a result, inflation rises, and the cost of living increases. On the other hand, a weaker currency might benefit exports by lowering the cost of domestic goods and services to citizens of other nations. This could positively impact the country’s trade deficit and overall economic growth.
Ukraine/Russian War – One reason for the dollar’s strength is that the war will impact the US economy less negatively than the Eurozone, the United Kingdom, and Japan. While the rise in oil and food costs caused by Russia’s invasion of Ukraine is predicted to have a global impact, Europe (notably the United Kingdom) and Japan are expected to be hurt worse than the United States. As a result, a substantially stronger US economy raises demand for US assets, which will be less adversely affected than assets from other countries, resulting in a stronger dollar.
Bottom Line
The link between politics and currency prices is difficult to establish. The impact of such a messy and frequently personality-driven field on such a complicated system does not lend itself well to study. As a result, it has generally been less popular among economists than analyzing the impact of more natural elements. However, researchers who have studied the matter have agreed that political events, particularly those in democratic regimes, influence the currency’s value.
