Abstract
This paper examines how exchange rates respond to geopolitical risk (GPR) and trade policy uncertainty (TPU) shocks using a panel local projection framework. We analyze monthly bilateral exchange rates of advanced economy and most freely floating emerging market currencies against the U.S. dollar from 1985 to 2025. We document two main findings. First, large global GPR shocks, defined as those above the 90th percentile, exhibit threshold effects, causing advanced economy currencies to depreciate against the U.S. dollar more strongly and more significantly than those of emerging markets. In contrast, country-specific GPR shocks trigger pronounced depreciation in emerging market currencies, while responses in advanced economies are delayed and less statistically significant. Second, TPU shocks above the same threshold lead to significant depreciation against the U.S. dollar across both country groups, with larger effects on emerging markets. Our results highlight the non-linearity of GPR and TPU shocks and their differential impacts across country groups.