How can geopolitical tensions influence the exchange rate of a currency?

Geopolitical tensions can significantly influence investor behavior, particularly by creating uncertainty in the markets. When tensions arise—be it from conflicts, political instability, or economic sanctions—investors often react by seeking safer assets to protect their investments. This behavior is driven by the desire to minimize risk during uncertain times.

Typically, investors turn to "safe haven" currencies, such as the US dollar, Swiss franc, or Japanese yen, which tend to maintain their value better in turbulent conditions. This increased demand for these safer currencies can lead to appreciation relative to riskier currencies, thus influencing the overall exchange rates.

The other options do not accurately reflect the nuances of investor behavior in response to geopolitical tensions. Increased demand for all currencies is rare—investors are more selective; asserting that tensions have no effect contradicts the observed market behaviors; and stating that they stabilize currency values overlooks the volatility that often accompanies geopolitical risk.