The aftermath of the 2024 US presidential election has reverberated globally, particularly impacting exchange rate markets. Following the certainty of the election outcome on November 6, 2024, non-pegged currencies depreciated against the USD. To delve into the reasons behind these depreciations, we analyzed three measures of exchange rate movements. First, we observed the maximum depreciation on the first trading day after the election results. Second, we looked at the depreciation after four days to gauge reactions from monetary authorities and financial markets. Lastly, we examined the depreciation one week after the shock to determine if exchange rates stabilized or experienced further depreciation.
Surprisingly, the initial exchange rate movements observed after the election were not reversed one week later. In fact, in 26 out of 73 bilateral exchange rates against the US Dollar, depreciation increased even more post-election. Countries like South Africa, Thailand, Hungary, Czech Republic, Romania, Bulgaria, and Poland experienced pronounced depreciations, sparking discussions among policymakers, especially in emerging markets where these movements create instability.
The outcome of the 2024 US election served as a quasi-natural experiment to test countries’ resilience to exchange rate pressures. Through high-frequency data analysis, we identified factors contributing to cross-sectional differences in currency returns against the USD. Notably, a positive correlation of around 40 percent was observed between the depreciation rate and the ICRG institutional score, indicating market expectations regarding the new US administration’s stance on countries with varying institutional qualities.
Further analysis through multivariate regressions revealed key insights. Countries with stronger institutions experienced more significant depreciations. Exchange rate interventions and real effective exchange rate misalignment influenced depreciation after specific time horizons. Additionally, bilateral trade surplus with the US and exposure to policy changes, as indicated by the Trump Risk Index, played roles in limiting or exacerbating currency depreciation.
As the political landscape continues to evolve, these findings shed light on the intricate relationship between global politics and exchange rate movements. Policymakers and market participants alike must remain vigilant and adaptive in responding to these dynamics to ensure stability and resilience in the face of financial shocks.
