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How Political Instability Impacts Foreign Exchange Rates: Analyzing Recent Examples


Political instability can have a huge impact on foreign exchange rates. The foreign exchange market, or Forex, is the largest and most liquid financial market in the world with an estimated daily trading volume of over 5 trillion dollars. It is an ever-changing market that is driven by news and events, both global and domestic. When it comes to political instability, news reports can cause rapid changes in exchange rates that can have a significant effect on businesses. Let’s take a look at some recent examples to understand how political instability impacts foreign exchange rates. 

US-China Trade War 

One of the biggest influences on foreign exchange rates in recent years has been the ongoing trade war between China and the United States. In 2018, President Trump imposed tariffs on Chinese imports which caused a dramatic drop in the value of China’s currency, the Renminbi (RMB). This led to China devaluing its currency to mitigate some of the effects of the tariffs. As a result, other currencies around the world saw their values increase relative to the RMB. 


Brexit Referendum 

Another example of how political instability affects foreign exchange rates is Brexit. In 2016, when Britain voted to leave the European Union (EU), there was an immediate drop in the value of the British Pound Sterling (GBP). This was due to uncertainty surrounding Britain’s future relationship with Europe and whether or not they would be able to secure good trade deals with other countries outside of Europe. This caused other currencies like US Dollar (USD) and Euro (EUR) to soar in comparison to GBP as investors sought out more stable investment opportunities during this period of uncertainty. 


Political Turmoil in Turkey 

Finally, we can look at Turkey as another example of how political instability impacts foreign exchange rates. In 2016, President Recep Tayyip Erdogan declared a state of emergency after a failed coup attempt, resulting in massive capital flight from Turkey as investors feared for their money’s safety. This caused Turkish Lira (TRY) to plummet against other major currencies like USD and EUR as investors moved their funds out of Turkey into safer investments elsewhere. 


Conclusion: 

Businesses that operate in the international markets are often exposed to political instability which can have dramatic effects on foreign exchange rates. This can be seen from recent events such as the US-China Trade War, the Brexit referendum, and political upheaval in Turkey. These fluctuations can lead to great uncertainty for businesses that may be using different currencies for investments or trades and need to understand the risks associated with the changing market trends. It is essential for organizations to stay informed of current political events that could potentially affect their foreign exchange rate, in order to make informed decisions about how best to manage their exposure to these volatile markets. 

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