How Does Geopolitical Risk Affect the USD, Currency Movements?
After strengthening more than 6% so far this year, investors are reportedly beginning to get bearish on the USD, as Trump’s policies and Fed’s rate cuts should put pressure on the greenback during the latter part of 2025.
Possibly. While exchange rate movements are unpredictable, there are some empirical findings that can help reduce the uncertainty.
In this piece published in the Journal of Financial and Quantitative Analysis, the authors use our ICRG data to help formulate an asset pricing model that incorporates information about unanticipated movements of political risk relative to the US economy, showing that it can grab a significant part of excess return in currency momentum. The findings also show that currency traders tend to ‘take on global political risk when investing in such strategies,’ and that political risk is a natural limit to arbitrage in the FX market, and thus shapes profitable momentum trades even after accounting for volatility and high illiquidity.
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PRS INSIGHTS
Moving beyond current opinions, a seasoned look into the most pressing issues affecting geopolitical risk today.
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