Within minutes of the result of the 2024 US presidential election becoming clear, it triggered a global tremor in currency markets. This column investigates how institutional quality shaped currency responses to the election, using high-frequency exchange rate data for 73 countries. Virtually all currencies depreciated against the dollar immediately following the election result, which markets had not anticipated. Surprisingly, countries with stronger institutional quality – typically considered more resilient – experienced larger and more persistent depreciations. Under the new administration’s transactional and unilateralist orientation, strong institutional alignment with liberal democratic norms may have increased perceived exposure to US policy uncertainty.
The US presidential election of 6 November 2024 was not only a political turning point in Washington. Within minutes of the result becoming clear, and after the Tokyo session started, it triggered a global tremor in currency markets. Almost every currency in the world depreciated against the US dollar, with losses concentrated in the hours after midnight GMT, when the outcome was no longer in doubt. The euro fell from 1.0936 to 1.0694 per dollar in just a couple of hours (Figure 1).
Figure 1 High-frequency exchange rate movements around the 2024 US election
Note: We select a two-day window around 6th November 0:00 GMT. We use a moving average of the previous 60 minutes to smooth random fluctuations.
Sharp exchange rate reactions to elections are not new. As underlined by Frankel (2024), William Nordhaus (1975) also predicted an opportunistic business cycle behaviour for exchange rates and international reserve holdings in emerging markets. Usually, the ruler in power uses the exchange policy to prop up the currency before the election to maximise the chances of re-election. A strong currency can be associated with superior economic performance in many emerging markets. Then, if re-elected, the re-elected ruler let the currency depreciate (sometimes sharply).
A large literature has shown that shifts in political leadership can move exchange rates as investors reassess the likely trajectory of trade, monetary, and foreign policy (Stein and Streb 1998, 2004, Quinn et al. 2023). In these studies, one lesson has been especially robust: strong domestic institutions are a source of resilience, reassuring markets and dampening volatility. The events of November 2024, however, told a different story.
The outcome of the 2024 US election offers us a very well-suited quasi-natural experiment to test the resilience of countries to exchange-rate market pressures. Indeed, due to the nature of the Republican platform and thanks to the use of high-frequency data, we can identify the factors that explain the cross-sectional differences in currency returns against the US dollar. One of the primary conditions for our identification process is that the outcome of the 2024 US presidential election surprised global markets. Graphical evidence for virtually all the currency pairs in the world unequivocally supports this supposition. We can see steady or rising trends in currencies before 6 November and dramatic falls in nearly all exchange rates within minutes after the outcome was realised. Its timing and universality, close to 0:00 GMT on election night, suggest that the event was unexpected to market participants. This would make the outcome of the election a good exogenous shock, allowing us to make causal inference credibly in diff-in-diff style methodology.
Using one-minute high-frequency exchange rate data for 73 currencies, Aizenman and Saadaoui (2024) find that countries with stronger institutions have experienced larger and more persistent depreciations against the dollar. Figure 2 plots the relationship between the ICRG institutional score – a composite measure of governance quality, rule of law, and democratic accountability – and the magnitude of currency depreciation one week after the election. The correlation is both positive and statistically significant at the 1% level.
Figure 2 Correlation between institutions and exchange rate movements
Note: Countries with higher ICRG institutional scores have experienced a stronger depreciation, proposing that markets’ participants expect that these countries will be impacted by the changes in the US policy.
This result runs counter to conventional wisdom. In normal times, strong institutions lower risk premia and anchor investor expectations. But the 2024 election marked a geopolitical realignment. The incoming administration signalled a pivot away from multilateralism and a rules-based international order toward a more transactional, bilateral approach. Under the previous global configuration, alignment with liberal democratic norms was an asset, often rewarded with closer policy coordination and preferential treatment. In the new environment, these same characteristics appear to have heightened perceived exposure to US policy uncertainty.
In the days following the election, the pattern of depreciation was remarkably persistent. One week after the vote, exchange rates in 26 countries had fallen even further than they had in the immediate aftermath of the announcement. Figure 3 shows the breadth of the effect: nearly all currencies in our sample lost value against the dollar, with the steepest declines typically found in economies with reputations for institutional solidity.
Figure 3 Exchange rate movements in the aftermath of the 2024 US election
Note: One week after the information shock, the depreciation was even greater in 26 countries out of a sample of 73 bilateral exchange rates against the US dollar. We do not include the euro in the sample because the eurozone is composed of different sovereign countries. We have 73 currencies against the US dollar, but the sample is reduced to 64 in Table 1 because of the limited availability of institutional scores.
To test whether this link between institutions and depreciation was simply masking other vulnerabilities, we controlled for several confounding factors. We used the exchange rate regimes, current account positions, real effective exchange rate misalignments, bilateral trade balances with the US, and exposure to anticipated policy shifts as measured by the Economist Intelligence Unit’s Trump Risk Index. The result was robust across specifications and time horizons. Neither differences in market liquidity nor relative GDP per capita altered the finding.
A more profound look into the institutional score revealed which dimensions mattered most. Economies that scored highly for low corruption, low military involvement in politics, strong socioeconomic conditions, law and order, and democratic accountability tended to see sharper depreciations. In other words, the institutional traits most closely associated with the liberal democratic order were the ones that, in this new geopolitical context, made countries appear more vulnerable to shifts in US policy.
The implications are important. Institutional quality remains a central driver of long-term growth and development (Acemoglu et al. 2005), but its role in buffering short-term shocks is not immutable. When the global strategic environment shifts, even the most robust governance frameworks can become channels through which uncertainty is transmitted rather than absorbed. For policymakers, this suggests a need to think beyond the domestic sphere: diversification of strategic partnerships, reinforcement of financial safety nets such as reserve buffers and swap lines (McCauley 2025), and the integration of geopolitical alignment into financial stability assessments may all be necessary (Airaudo et al. 2025).
The 2024 US presidential election represents an inflection point in the global order, 3 where the US is no longer perceived as the anchor of a rule-based, democracy-oriented international system. Instead, there is a growing expectation that the new administration will adopt a more transactional, bilateralist, and possibly authoritarian-friendly foreign policy (as shown by the negotiations around the tariffs). This shift introduces a new form of uncertainty for well-institutionalised democracies that had previously benefited from alignment with US-led globalisation. In this context, market participants may anticipate a withdrawal of preferential treatment, support, or policy coordination with these countries, triggering sharper depreciations. Conversely, countries with weaker institutional profiles – once considered riskier – may now be perceived as relatively insulated from reputational or strategic downgrades under the new US posture. Thus, the observed currency movements reflect not only economic fundamentals but also a realignment of political risk premia in response to an uncharted global trajectory.
Whether the 2024 episode turns out to be a temporary inversion or the start of a more enduring pattern remains to be seen. Historical precedents, from the end of the Vietnam War to the recent escalation in US–China trade tensions, suggest that revaluations of political risk premia can persist for years. If US foreign policy continues on a transactional trajectory, investors may keep pricing institutional alignment not as a safe haven but as a potential point of exposure.
The election thus served as a reminder that markets do not operate in a political vacuum. In November 2024, the very qualities that once made countries safer in the eyes of investors became, within a few hours, markers of vulnerability. Understanding how and when such reversals occur is crucial for both scholars of political economy and the policymakers tasked with steering their economies through an increasingly uncertain geopolitical order.
Source : VOXeu
