The Impact of Global Events on Currency Exchange Rates

The Impact of Global Events on Currency Exchange Rates

Submitted By: ANUSHKA SINGH
ROLL NO. 23042150058
Submitted By: ANURAG RATHOR
ROLL NO. 23042150056
Under the guidance of
Dr. Nupur Mishra

School of Finance and Commerce
GALGOTIAS UNIVERSITY
GREATER NOIDA, UTTAR PRADESH, INDIA

Chapter I: Introduction

1.1 Background of the Study

Currency exchange rates represent one of the most critical components of the modern global financial system. These rates determine the relative value of one currency against another and play a fundamental role in international trade, foreign investments, economic policy formulation, and overall economic stability. The dynamic nature of exchange rates makes them highly sensitive to various internal and external factors, with global events being among the most significant drivers of currency fluctuations.

In today's interconnected world, economies are more interdependent than ever before. What happens in one part of the world can have immediate and far-reaching consequences on currency markets across the globe. Global events such as financial crises, geopolitical tensions, natural disasters, pandemics, political changes, and economic policy shifts can trigger substantial volatility in foreign exchange markets.

The significance of understanding the relationship between global events and currency exchange rates has become increasingly apparent, especially in light of recent major global disruptions. The 2008 global financial crisis demonstrated how quickly currency markets could be destabilized, with several currencies experiencing dramatic depreciation while safe-haven currencies like the US Dollar and Japanese Yen strengthened significantly. Similarly, the Brexit referendum in 2016 caused unprecedented volatility in the British Pound, affecting not only the UK economy but also having ripple effects across European and global markets.

More recently, the COVID-19 pandemic that began in 2020 has provided another stark example of how global events can reshape currency markets. The pandemic led to massive capital flight from emerging markets to developed economies, causing significant depreciation in many developing country currencies while strengthening reserve currencies. The subsequent economic recovery patterns have continued to influence exchange rate movements as countries have implemented different monetary and fiscal policies.

The ongoing Russia-Ukraine conflict, which escalated in 2022, has further highlighted the vulnerability of currency markets to geopolitical events. The conflict has not only affected the Russian Ruble and Ukrainian Hryvnia directly but has also impacted global commodity prices, energy markets, and broader economic sentiment, influencing currencies worldwide.

For India specifically, as an emerging economy with significant integration into global markets, understanding these dynamics is crucial. The Indian Rupee has experienced considerable volatility in response to global events, affecting everything from import costs and inflation to foreign investment flows and monetary policy decisions by the Reserve Bank of India.