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What is the impact of political instability on currency exchange rates?

Debrah Ramsdale

Well, first of all, let me explain what currency exchange rates are. You know how we use money to buy things? Well, each country has its own type of money, like the US dollar or the Euro. When people want to buy things from other countries, they need to exchange their money for the other country's money. That exchange rate tells you how much of one type of money you need to buy a certain amount of the other type of money.

Now, when there is political instability in a country, it can affect the value of their money compared to other countries. Political instability means that there is a lot of arguing and fighting between different groups in the country. This can lead to things like riots, protests, and even violence.

All this chaos can scare people who want to do business with that country. They might be afraid to invest in companies there or to trade with people there. This can make the value of that country's money go down compared to other countries. When a currency loses its value, it takes more of that currency to buy other currencies. So, the exchange rate goes up.

On the other hand, if a country is stable and safe, people might be more willing to do business with them. This can make their money more valuable compared to other currencies. When a currency gains value, it takes less of that currency to buy other currencies. So, the exchange rate goes down.

So, to sum it up, political instability can cause a country's currency to lose value compared to other currencies. This can cause the exchange rate to go up, which means it takes more of that currency to buy other currencies. When a country is stable and safe, the opposite can happen. Its currency can gain value compared to other currencies, and the exchange rate can go down.