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  • Firdaus Maalim

Politics & Currency Exchange Rates

by Firdaus Maalim on 26/09/22

Image source: Wix media

Recent events such as the war in Ukraine and the election of Presidents have affected their country's exchange rates. The value of the American dollar increased with Trump's election as did the value of the Kenyan shilling with the announcement of President William Ruto's win. Why do such political events impact global financial markets and how do they do so?

In simple terms, the exchange rate is a rate at which a country's currency can be exchanged for another. This is heavily influenced by the ability that people and entities have to invest in the country. The following political factors and policies influence currency exchange rates.

  1. Political stability

  2. Elections

  3. Government Debt

  4. Trade Terms

  5. Political conflict

  6. Global Pandemics

The FX market is specifically exposed to risks from the above mentioned factors as they are significant enough to affect a country's economy and political risk. There is a lot of risk associated with investments, business analysts try their utmost best to forecast and avoid as many risks to the business as they can. This explains why political instability and mounting uncertainties in a country deter them from doing so.

Events such as elections are also a mirage of the types of legislation and policies that shall be implemented in the country’s’ near future. Therefore, a government’s currency policy might be its most important economic initiative. This is especially true in an open economy, because almost every other aspect of the economy depends on how the national and global economies interact. Donald Trump symbolized financial growth, freedom and security which attracted even more investors into the country. Foreign investments in a country are indicators that there is positive economic growth. Iran’s sanctions began with the hostage crisis of 1979, the country has been heavily sanctioned since. The prolonged lack of foreign investment in Iran has contributed to the significant drop in the country’s economic growth and currency. A lift on these sanctions could benefit the country by an expected rise of 3.7% in its per capita welfare.

The dollar is argued to be the strongest currency with the most widespread use. The American dollar is used for daily use as far as in Vietnam, Cambodia, and even in Somalia. This is largely due to the global trust and confidence in its ability to pay its obligation and low political and economic risk. The United States is perceived to have low national risk. National risk is the uncertainty in a country caused by various factors which are expected to bring potential capital losses especially political and economic risks. This clarifies that political and economic stability are synonymous with a safe investment environment.

Aside from politics, health related disasters may also affect currency exchange rates. They have this effect because they may interfere with imports and exports of goods and also labour trade. With the rise of Covid 19 we witnessed countries such as New Zealand go into a total lockdown barring anyone from coming into the country, they further banned imports on several goods to prevent the spread of Corona Virus.

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