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The Impact Of Politics On Exchange Rates


From the recent Russian-Ukrainian war, we can see that the stabilization of a country’s political situation will affect the country’s economy, especially the exchange rate. Most political factors have suddenness, uncertainty and other factors, so they will cause market unease, and then lead to violent fluctuations in financial markets. Generally speaking, political factors that affect the exchange rate market include:

Regime Change

When the regime of a country or region changes, the new government may invalidate the currency of the previous regime and then issue its own currency, and the currency of the previous country may become worthless. For example, after Iraq occupied Kuwait in 1990, it immediately declared Kuwait to cease to exist as its own 19th province, and the Kuwaiti currency was abolished, causing most of the rich in Kuwait to become poor overnight.


When there is a coup in a country, the exchange rate of the country’s currency will fall sharply, and the turmoil of the situation will always be an important reason for hitting the currency. For example, the political situation in Southeast Asia has been unstable, such as the Philippines, Thailand, Indonesia and other countries, there are frequent coups by the military and different parties, each of which takes a heavy toll on the country’s currency.

Accidental Death of Important Government Official

The assassination or accidental death of an important government official would also bring political instability and lead to a sharp drop in the country’s currency. For example, when President Ronald Reagan was in office, Reagan was suddenly assassinated. When speculators in the market heard the news, they immediately sold the dollar in large quantities and bought the Swiss franc and the mark, causing the dollar to fall sharply.

Political Scandal

When a country’s politicians and government officials are involved in sexual affairs, financial scandals, election fraud, resignation and other events, it will also cause violent fluctuations in the country’s currency. For example, the resignation of the US Treasury Secretary once aroused the distrust of many investors in investing in the United States, resulting in a large amount of capital flowing out of the United States and a sharp drop in the dollar exchange rate.


The war factor is also an important factor for the exchange rate of the warring countries to plummet, because investors will be worry about the country can withstand the drag of the war, and whether it will trigger the economic recession of the warring countries and other issues. For example, the U.S. dollar had been under pressure on the eve of the U.S. and Iraq wars, pushing up the safe-haven Swiss franc.


The strike represents the destruction of the economy of employment in the country where the strike take place, and that country’s economy suffers, while causing the country’s currency to fall.

Terrorist Attack

Terrorist attacks are also the main factor behind the sharp drop in the exchange rate in short term. For example, the terrorist attack on the World Trade Center in the “9.11 Incident” caused thousands of deaths. These people are the elites of the US economic and financial circles. The loss to the US economy is immeasurable. At that time, the exchange rate of the U.S. dollar fell sharply. People sold the U.S. dollar one after another and bought safe-haven currencies such as the Swiss franc and the euro to avoid risks. The Swiss franc rose by nearly 5% within half an hour.

The social and political factors that affect the foreign exchange market are usually sudden events. Such short-term emergencies will cause the spot price of foreign exchange to fluctuate, or even deviate from the long-term equilibrium price. But when the event occurs, the foreign exchange trend will move in the direction of its long-term equilibrium price. Generally speaking, short-term price changes can only correct the direction of the long-term equilibrium price of foreign exchange, but it is difficult to change or completely reverse its long-term fluctuation trend.

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