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Why Currency Values Drop After Political Change

Whenever there is political change, there is currency value change. Whether such political change is for the better or worse is often a matter of opinion, but almost every time currency values seem to drop after such a change. Most recently the US dollar has experienced its worst start to a year in decades, mainly due to President Trump taking residence in the White House. There are many reasons why political changes usually lead to a fall in the nation’s currency value.

Elections and Volatility

In the run-up to any election, currency values always fall. This is because traders view it as a time of political instability, with a greater chance of the currency falling leading to a sell-off by many traders. There will likely be different financial policies from all those up for the election, meaning investors and traders will be uncertain about what the future for a currency will hold until the outcome of the election is revealed. Trade can also slow down during elections, further weakening a currency.

Changing Monetary Policies

When a new leader or political party takes charge, there is often a fresh monetary approach. This is a strong driver of a nation’s currency and can direct it in a new way. Even though in the long run this could be successful, the uncertainty such a change brings about is usually harmful and will see the currency value fall. However, a currency’s value can receive a boost if the party elected is viewed by traders as one focusing on economic growth first and foremost.

The Effect on Exchange Rates

Currencies are traded in pairs across the world. When there is political change and elections in one country then this offers a great opportunity for forex trading with City Index. Selling the currency of a country undergoing political change and buying one of its trading partners in a more stable nation should help you profit from the practice. While risky traders can buy the currency when it drops to a low point, hoping it will bounce back.

Uncertainty

Such uncertainty around a change in politics puts off investment. Uncertainty also surrounds the future of inflation and interest rates, with lower inflation leading to a rising currency value and vice-versa. Interest rates can often be changed with a new political party at the helm, impacting upon inflation to see it rise and currency values fall.

These are some of the reasons currency values fall after political change, which should be considered when trading forex.

Updated: February 14, 2017 — 2:21 pm

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