The Influence of Political Instability on Currency Values

For a long time, currency values have been heavily influenced by political instability. The uncertainty in the country’s political landscape can easily have a ripple effect across the globe’s economy, of which the exchange rates of a currency is one of the most visible. In today’s ecosystem of global financial markets, any event is linked to others, and the instability of a political climate in a country tends to impact currency values globally.

It was not always clear how politics affect currency values, but the results were large. Investors generally get nervous where political turmoil looms, whether it be government change, civil unrest, or a threat of war. This causes the usual response from the people of that country, as they move their capital to safer assets, or in stable economies resulting in the nation’s currency to reduce. The result of which is a weakening demand for the local currency and a consequent currency depreciation.

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For instance, when there is political uncertainty, investors go to traditional safe currencies such as the US dollar, Swiss franc, or Japanese yen, which are considered more stable. It is particularly true in emerging markets when surging political turmoil can cause currencies in those markets to drop fast. What of a country where sudden changes in leadership, or a dubious election result, suddenly occur? In the immediate aftermath, the local currency will devalue against the other currencies worldwide as foreign investors withdraw their investment, afraid of what might lie ahead. The strength of the currency can be in part direct result of losing trust in the government’s ability to manage the economy.

In Forex trading, these political events become a win for the traders who live off the volatility. As expectant political instability has large and sharp effects on currency values, forex markets are highly sensitive to news and events. If they are well placed to see such events coming they can profit from the moves by buying or selling currencies. But political instability can also inch at the level of risk that is difficult to guess. Those traders who use forecasts in stable environments may be surprised by the consequences of politics.

Currency values are also impacted by political instability workings of foreign markets. Currency strength is influenced highly by factors of international trade and foreign relations. Foreign investment in a country, results in its economic performance depending on the state of the country. This devalues the currency in the short run, and can also hurt long run economic growth.

Changes in currency values can also be driven by political decisions that impact trade policies, put a country under sanctions or affect diplomatic relations. For instance, when a country’s agreements with respect to trade or tariffs are altered it may result that its currency either strengthens or weakens. The political climate in other nations, particularly of those which ties in important economics within the country currency can also react. As large political events like an election or a referendum occurs in an important country, Forex trading markets can be experiencing shocks, resulting in a change in global currency prices.

In a nutshell, political instability contributes heavily towards currency valuation because it affects investor sentiment, the quality of global trade and leads to high volatility in financial markets. As such, understanding its geology and seeking out its best markets remains part of Forex trading and is part of monitoring global economies.