Jake Tuff 
Fiscal policy changes often have an indirect impact on foreign exchange market prices due to how investment markets react to changes in government spending and taxes.
Government spending and taxation decisions play an integral part in shaping economic landscapes and determining its international valuation.
Taxation
Taxes are used by countries to raise money for infrastructure, education systems, social services and military spending. Countries also impose import duties to help manage inflation and maintain balance of payments.
Changes to government spending, taxes and debt levels can significantly alter a currency’s value. Policies promising growth and stability can build investor trust and strengthen its currency; while too much debt could deter investors and reduce investor confidence.
Taxes play an integral role in connecting fiscal policy to forex markets. Lower taxes attract foreign investment and strengthen currencies; conversely, higher taxes deter investors, leading to currency weakness. They also play an essential role in how trade imbalances impact currency values; an upward revaluation will tend to boost imports that pay taxes (such as energy and food imports), while a downward one shifts resources toward exports that don’t pay them.
Public Debt
Public debt levels also play a vital role in determining a country’s forex currency value, making it more challenging for governments to control inflation and meet budgetary goals, as well as finding financial resources on foreign markets.
Even without exchange rate overshoot, real devaluations has the potential to have serious fiscal repercussions in problem debtor countries, as its effect will be magnified because their foreign currency debt and initial deficit based on tradables is higher than savings made on domestic currency debt due to private sector efforts to invest savings into domestic inflation hedges and foreign assets.
An individual government may have to subsidize import costs and cut export subsidies in order to lower its debt burden and keep its currency aligned with international exchange rates, however this can create fiscal instability and reduced investor trust. Furthermore, multiple rate systems exacerbate devaluation’s fiscal ramifications by encouraging tax subsidy distortion.
Spending
Fiscal policy refers to a government strategy for running the economy over both short and long-term periods by prioritizing spending, borrowing and taxes. This differs from monetary policy which is set by central banks such as the Federal Reserve outside the scope of federal control.
Governments can implement either expansionary or contractionary fiscal policy depending on their economies’ needs. Expansionary policies expand government spending while decreasing taxes to boost economic growth during a recession; contractionary policies raise taxes while cutting spending, which may slow economic growth when inflation or unemployment levels exceed healthy thresholds.
An open economy allows fiscal policy to play an integral part in the value of currency values by changing investor confidence in it. Low taxes can attract foreign investment and strengthen a country’s currency; conversely, higher taxes could deter it and weaken it over time. Therefore, forex traders need to stay informed on government spending, tax, and debt news in order to stay abreast of potential opportunities and threats to their trading strategies.
Trade Balances
As experienced traders understand, forex trends and basic valuation factors change with time. Furthermore, traders must keep in mind the influence of fiscal policy on currency values through import and export regulations; more spending might initially stimulate an economy but can lead to higher prices and an increasing trade deficit – ultimately weakening its currency value.
Substantial budget deficits may pose serious problems as they accumulate liabilities to the rest of the world that must eventually be paid back. To mitigate this risk, countries should seek to balance their spending using policies that increase prices of tradable goods relative to non-tradables; this may require tight monetary policy combined with either nominal exchange rate depreciation or real exchange rate depreciation depending on their economic model.
