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Chapter 10. What Moves the Markets: Basi... > Political and Social Environment

Political and Social Environment

The effect a country's political and social environment can have on its currency can be both simple and virtually impossible to recognize. But that effect should never be disregarded. A nation's economic policy can be broken into two categories. The first is monetary policy, which encompasses interest rates, money supply, and control over central bank activities. It also defines how much control a government exerts over its currency, called managed currency. The second category is fiscal policy, which is the government's attempt to direct the economy through taxation and spending.

A nation's social environment plays a critical role in the foreign exchange market and creates the greatest and most volatile risk. When social change occurs, it tends to be significant. Whether it's the velvet revolution in Prague, civil war in Sri Lanka, or a peace treaty in Northern Ireland, the event directly affects the foreign exchange market.


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