6. How Do Political Events Affect Currency Exchange Rates and Trade?
Political events can really change how much one country's money is worth compared to another country’s money, as well as how countries trade with each other. This happens mainly through changes in how investors feel, what the government decides, and how stable the economy is. Let’s look at some important areas where political events can make a difference:
When a country is politically stable, investors feel more confident. But if there’s political chaos, it can create uncertainty. For example, in June 2016, when the UK voted to leave the EU (Brexit), the British pound (GBP) dropped about 10% compared to the US dollar (USD) very quickly. The pound fell from about 1.32 just a week after the vote. Investors were worried about the UK’s economic future outside the EU.
When a government changes rules about trade, like adding tariffs (taxes on imported goods), it can change the value of money and how countries trade. For instance, when the US added tariffs on imports from China in 2018, the Chinese yuan (CNY) lost 6% of its value against the dollar by the end of 2019. Experts from the International Monetary Fund (IMF) estimated that these tariffs could lower global trade by about 0.5% in the coming years.
Sometimes, political choices can lead to economic sanctions, which can really hurt a country’s money value. For instance, when the US put sanctions on Iran in 2018, the Iranian rial (IRR) lost over 60% of its value against the dollar within just a year. The IMF reported that inflation in Iran shot up over 40%, making the economy even more unstable.
Political events can also affect what central banks do with their money policies. For example, in 2021, the Central Bank of Turkey raised interest rates a lot to fight inflation and keep the economy stable during political unrest. After this, the Turkish lira (TRY) gained about 50% in value against the dollar for a short time.
Elections can lead to changes in currency value based on how people think the results will affect the country. For example, after the 2020 US presidential election, the dollar index dropped about 2% right after the results were announced, as people expected changes in money spending and policies under President Biden’s leadership.
Serious global issues, like war, can suddenly change currency values. During the 2008 financial crisis, partly caused by global tensions, the euro (EUR) went up against the dollar, moving from 1.25 in just six months. Investors were looking for safer places for their money.
It’s really important to understand how political events can change currency exchange rates. These changes can affect how countries trade and their competitiveness in the market. As we’ve seen, factors like investor confidence, government decisions, and global tensions all play a role in how money is valued around the world. Keeping up with political news is key for businesses involved in international trade to manage risks effectively.
6. How Do Political Events Affect Currency Exchange Rates and Trade?
Political events can really change how much one country's money is worth compared to another country’s money, as well as how countries trade with each other. This happens mainly through changes in how investors feel, what the government decides, and how stable the economy is. Let’s look at some important areas where political events can make a difference:
When a country is politically stable, investors feel more confident. But if there’s political chaos, it can create uncertainty. For example, in June 2016, when the UK voted to leave the EU (Brexit), the British pound (GBP) dropped about 10% compared to the US dollar (USD) very quickly. The pound fell from about 1.32 just a week after the vote. Investors were worried about the UK’s economic future outside the EU.
When a government changes rules about trade, like adding tariffs (taxes on imported goods), it can change the value of money and how countries trade. For instance, when the US added tariffs on imports from China in 2018, the Chinese yuan (CNY) lost 6% of its value against the dollar by the end of 2019. Experts from the International Monetary Fund (IMF) estimated that these tariffs could lower global trade by about 0.5% in the coming years.
Sometimes, political choices can lead to economic sanctions, which can really hurt a country’s money value. For instance, when the US put sanctions on Iran in 2018, the Iranian rial (IRR) lost over 60% of its value against the dollar within just a year. The IMF reported that inflation in Iran shot up over 40%, making the economy even more unstable.
Political events can also affect what central banks do with their money policies. For example, in 2021, the Central Bank of Turkey raised interest rates a lot to fight inflation and keep the economy stable during political unrest. After this, the Turkish lira (TRY) gained about 50% in value against the dollar for a short time.
Elections can lead to changes in currency value based on how people think the results will affect the country. For example, after the 2020 US presidential election, the dollar index dropped about 2% right after the results were announced, as people expected changes in money spending and policies under President Biden’s leadership.
Serious global issues, like war, can suddenly change currency values. During the 2008 financial crisis, partly caused by global tensions, the euro (EUR) went up against the dollar, moving from 1.25 in just six months. Investors were looking for safer places for their money.
It’s really important to understand how political events can change currency exchange rates. These changes can affect how countries trade and their competitiveness in the market. As we’ve seen, factors like investor confidence, government decisions, and global tensions all play a role in how money is valued around the world. Keeping up with political news is key for businesses involved in international trade to manage risks effectively.