How has the coronavirus affected world currency prices: And what does the future hold?
The global nature of our economy means that significant events such as the COVID-19 pandemic can have a ripple effect on the local economies in all four corners of the world. It’s fair to say that the national lockdowns brought on by the coronavirus outbreak have put the worldwide economy on hold, leaving millions of workers either jobless or furloughed while the peak of the pandemic takes hold.
In most financial markets, uncertainty brings volatility. The unprecedented measures taken to curb the COVID-19 outbreak have certainly led to far-reaching social and economic disruption. The S&P 500, which is an index of the 500 biggest US companies and widely regarded as a benchmark for the health of the global economy, has suffered seismic losses in the short term, surpassing the likes seen during the start of the Great Recession and the Wall Street crash. However, more recently, it has experienced a rally in April of 29% – sitting just 15% lower than its all-time high despite earnings estimates from major corporations continuing to fall.
At the lowest point of the economic fall-out from coronavirus, some $26 trillion had been erased from the value of global equity markets, affecting everything from insurance and pension funds through to legitimate investors and shareholders. Somewhat surprisingly, the US dollar appeared to fare well in most of the forex markets. In the world of FX trading where fiat currencies are paired against one another, there has been a sense that traders have sought to buy more of the greenback against most other major currencies like the British pound, euro and Japanese yen because they see it as a safe haven hedge against their more perilous trading positions.
The impact of the Fed on the US dollar
Ironically, it was an announcement by the US Federal Reserve that brought about a reversal in fortunes for the dollar of late. The Fed confirmed a program of loans worth $2.3 trillion to local state governments and small to medium-sized enterprises (SMEs) as the States battle to get to grips with the economic fall-out from the COVID-19 lockdown.
The Fed was also prompted to cut its interest rates to zero percent, as well as restate quantitative easing to combat the lack of liquidity in the markets. This increased supply of dollars, along with the rising positivity regarding Asia coming out the other side of its COVID-19 lockdown, is likely to see a gradual weakening of the dollar in the coming weeks and months, with fewer forex traders taking solace in the dollar as they were in February and early March.
Other political events to have influenced the major forex pairs include the drama surrounding British Prime Minister Boris Johnson. Mr Johnson was admitted to intensive care with worsening coronavirus symptoms, but his discharge from hospital has seen the UK breathe a collective sigh of relief, resulting in a ‘Boris bounce’ against the US dollar.
COVID-19 threatens to hit all facets of our global economy
The critical question that remains unanswered for many forex traders is what percentage of the global economy will bounce back from the coronavirus lockdown. With government debts and deficits running at their highest levels since World War II, there are fears that the economic setbacks won’t be truly felt for some time yet. Fast emerging African economies in Nigeria, South Africa and Angola risk major catastrophe, according to the World Bank.
Although the US and Europe may have succeeded in flattening the curve, both financially and medically, the coming months will be a stiffer test to prevent these shockwaves from being felt elsewhere in less stable economies worldwide.