With the outbreak of Covid-19, the world economy went through some meltdown following restricted movements across borders and fewer interactions in the physical market space. Nations around the globe continue to face economic challenges as they come to terms with the ravages of this disease. The global foreign exchange trade has not been left out in these developments. First and foremost, the foreign exchange market is very volatile and any slight changes in the economy and associated interest rates will cause a shift.
The coronavirus was first reported in China in December 2019 and continued to spread faster reaching to other parts of the world. What was initially a problem in China went on to affect other people around the globe in Asia, Middle East, North America, Australia, Europe and so on. The World Health Organization (WHO) soon declared it a world pandemic with continued confirmation of cases and increased death toll.
Initial Forex Market Changes due to Covid-19
China and Australia were among the first countries to experience a major shift in the forex market at the beginning of 2020. As the disease became a global concern, the world economy was badly hit. China’s lead in the coronavirus cases initially worked to their disadvantage in the global forex market. This went on to affect their close trading partners such as Australia.
China’s renminbi trade is restricted within controlled ranges and for that reason, the Australian dollar has been in most cases used as a proxy. However, it is considered a risk currency by some investors especially in unstable markets that tend to favor the stronger and stable currencies used for trade. Currency rates went down in Australia following confirmed cases of Covid-19 in the country.
Coronavirus Impact on the European Forex Market
Covid-19 effects started to find their way into Europe with Italy being the biggest loser. Covid-19 cases and the death toll in Italy rapidly surpassed that of China. The trend was soon noticeable in Germany, France and Spain. The Euro and USD had started to decline since the beginning of the year and the Covid-19 situation just made it worse.
Financial institutions pledged to pump in billions into the economy, and despite their efforts, there was no significant boost to traders confidence with some currencies. Most traders trusted the US dollar as a stronger and more stable currency to trade with. For instance, the European Central Bank (ECB) efforts to pump in billions didn’t persuade many investors to trust and trade with the Euro.
Countries around the world started to introduce safety measures to mitigate the coronavirus effects and this was much evident among Forex brokers in UK. To combat these economic challenges, the Bank of England cut down the base interest rates. At the same time, investors started to shy away from the sterling pound by selling it citing Brexit uncertainties. This drove the currency’s value further down. However, this was an eye-opener for other countries in the region that began to introduce stricter strategies to cope due to the virus to help their currencies recover.
Covid-19 Effects on the United States Dollar
Forex trading is all about foreign currency exchanges, with the United States Dollar making a major contribution in this market. Initially, the US was reluctant to put in measures to combat Covid-19 but this didn’t stop investors from purchasing US dollars. This has mainly been as a result of the willingness by the Federal Reserve to provide much more liquidity to the forex market. Again, the US dollar has a good history when it comes to the stability of currencies in this trading space. Therefore, it is usually the last resort to investors.
Despite the belief that traders have had in the US dollar, this trend may shift owing to the continued strain on economic and medical stability if the slow response to the virus continues in the country. This may ultimately hurt the global forex market.
There are a lot of uncertainties around the forex market and traders are still not sure of the best recovery strategies from their investments. The situation hasn’t been that bad in this market but its volatile nature can easily be hit hard with an unstable world economy. The coronavirus is a global concern and that put’s every investment at crossroads.