Institutional Strength Predicts Sharper Currency Declines After 2024 US Election

The analysis by Aizenman & Saadaoui (2024, revised 2025), part of NBER Working Paper 33193, provides one of the first high-frequency empirical studies of how institutional quality shaped global exchange rate behavior in the wake of the 2024 U.S. presidential election. They consider 73 currencies against the U.S. dollar and exploit minute‐by‐minute data around the time the election result became public at about 0:00 GMT on 6 November 2024. Currency markets reacted rapidly—with almost all non‐pegged currencies depreciating sharply once the outcome was no longer in doubt. [1] [2]

Unexpectedly, economies with stronger institutions—those scoring higher on measures of rule of law, low corruption, democratic accountability and others under the ICRG composite score—experienced larger and more persistent depreciations. In contrast with the prior literature, which sees strong institutions as buffers against political shocks, these countries saw their currencies fall more deeply, both immediately and in the following week. [1] [2]

To separate institutional effects from other risks, the authors controlled for multiple confounders: exchange rate regime (fixed vs floated), current account position, trade balance with the U.S., real effective exchange rate misalignment, GDP per capita, market liquidity, and exposure to U.S. policy shifts (via the Trump Risk Index). Even after controlling for those, institutional quality retained a strong positive correlation with depreciation magnitude. [1] [2] [3]

In particular, 26 out of the 73 currencies had depreciated more one week after the election than immediately after the result, suggesting the shock was durable in many cases. Some of the worst affected were countries like South Africa, Thailand, Hungary, Czech Republic, Romania, Bulgaria and Poland. [1] [3]

Strategic implications follow: for one, strong institutions may no longer function automatically as risk mitigators in times of U.S. policy regime shifts. Policymakers in well-institutionalized countries must now consider how geopolitical alignment with a shifting U.S. foreign policy posture might feed into risk premia. Reserve diversification, strengthening domestic buffers, and anticipating changes in bilateral relations may take on increased importance. For investors and global banks, models of country risk should update assumptions about how institutional quality interacts with U.S. political risk.

Open questions remain: whether this observed pattern is temporary or signals a longer‐term shift; to what extent monetary policy responses (e.g., interventions) mitigated depreciations; whether other components of U.S. policy (trade, foreign, environmental) will continue to exacerbate exposure; and how this pattern plays out within regions with differing U.S. exposure.