Why is political stability important for currency markets?

Political stability is crucial for currency markets because it creates an environment of reliability and predictability, which is vital for investors and traders. When a country enjoys political stability, it tends to attract foreign investments as investors seek secure and stable opportunities for their capital. This influx of foreign investment can enhance demand for the local currency, thereby strengthening it against other currencies.

Moreover, political stability reduces the risk associated with investments. Investors are more likely to commit resources to a country where they feel that their investments are protected from abrupt changes due to political upheaval, conflicts, or instability. As investments increase, the overall economic growth can follow, reinforcing the strength of the local currency.

In contrast, scenarios where political instability exists can lead to uncertainty and may deter foreign investments, thereby weakening the currency. Hence, the positive correlation between political stability, foreign investment, and currency strength makes the correct choice clear.