What is the Connection Between Geopolitics and Currency Movements? The Sterling, USD, Rupee, and some References to the ICRG Literature

The British sterling falls on Stamer’s leadership speculation; Amundi cuts exposure to the USD; and the Indian rupee gains on trade deal with the US.

There is a well-known connection between geopolitics and currency movements, and a range of studies using the ICRG data highlight how specific risk components—such as internal conflict and government stability—impact exchange rate appreciation, depreciation, and volatility.

Check out a few of these titles if time permits.

Elections: A January 2026 study published by the National Bureau of Economic Research analyzed 73 currencies following the US election and found a 40% positive correlation (significant at the 1% level) between a country’s ICRG score and its currency depreciation rate against the USD. Paradoxically, countries with better (higher) ICRG scores experienced larger depreciations immediately following the vote. (https://lnkd.in/es5gwsQj)

Internal Conflict: Research published in Economic Letters, using a panel of 153 countries found that a better ICRG score in the ‘Internal Conflict’ variable is consistently associated with exchange rate appreciation across all time horizons. Conversely, negative shocks to this variable can cause a monthly depreciation of approximately 2%. ((https://lnkd.in/eyqpurFy))

Currency Momentum and Excess Returns: A study on global political risk and currency momentum found that portfolios with high political risk (based on ICRG data) generate larger currency excess returns compared to low-risk portfolios. Another study found that a zero-cost strategy buying high-geopolitical-risk currencies and selling low-risk ones generates a significant 5.72% annual excess return. (https://lnkd.in/eDh2axmG)

Vortelinos and Saha (2016): This study confirmed that ICRG-measured political risk significantly impacts exchange rate volatility, with North American markets being among the most affected. (https://lnkd.in/e3xVt5J2…)

Predictive Power: Research involving 17 countries found that geopolitical risk data can improve the forecast accuracy of exchange rate returns for 88% of currencies in out-of-sample tests, with buy/sell signals generating excess profits in 65% of cases. (https://lnkd.in/e29e7HRK.)

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