Earlier in the year 2020, precisely in March, there was an outbreak of a pestilence that affected the whole world which for certain reasons will be referred to as the 'Pandemic-2020'.
This outbreak led to the death of millions around the world, businesses were forced to shut down; some temporarily and many others, permanently other devastating general effects of the 'Pandemic-2020' were experienced around the world.
In this article, we are going to look into the impact that 'Pandemic-2020' had on the Forex Market.
Impacts of 'Pandemic-2020' on the Forex Market Worldwide.
As a result of the compulsory stay-at-home law that was enforced, governments worldwide had to increase their spending to compensate by providing palliative and stimulus checks for the increased business shutdown and unemployment rate.
This incident led to decreased business travel which created a deficit and impacted the exchange rates worldwide.
As it is generally believed, the forex market is affected by supply and demand which affects the exchange rates.
Therefore, when these factors are affected, it has an effect on the foreign global market as well.
Impact of 'Pandemic-2020' on the U.S. Forex Market.
In this section, we will discuss two major impacts the 'Pandemic-2020' had on the U.S. market via two factors;
Considering these two different factors helps comprehend both the short-term effect and long-term impact the pandemic had on the U.S. market.
Stringency Index
The Stringency Index basically helps us to gauge and understand the response of individual governments against the 'Pandemic-2020' based on nine factors.
These include school closures; workplace closures; cancellation of public events; restrictions on public gatherings; closures of public transport; stay-at-home requirements; public information campaigns; restrictions on internal movements; and international travel controls.
After extensive independent research conducted by Georgia Southern University, it was concluded that the higher the number of reported cases rising in a country, the higher the economic instability.
This means the higher the Stringency Index of a country the more stable the economy of that country.
Due to the initial negligence of the U.S. government to provide measures to protect her population from the 'Pandemic-2020', investors were left in a state of confusion as to where the safe haven was because the U.S. Dollar was generally considered to be the safe haven during times of uncertainty.
This led to foreign currencies gaining strength over the U.S. Dollar from April 2020 to December 2021.
It was revealed by the Foreign Currency Index graph.
From the graph above it can be seen that the foreign currencies were slowly depreciating against the U.S. Dollar but at the inception of the 'Pandemic-2020' in March 2020, there was a clear drop. This showed that the U.S. Dollar fell against other foreign currencies.
The sharp decline of the U.S. Dollar was a result of the short-term reaction of the investors because of the uncertainty of the U.S. government's reaction to the pandemic.
But after the U.S. became pivotal in helping alleviate the pandemic, together with the approval of vaccines and after some persistent political messages by the U.S. government, confidence was restored in investors which led to the increase in the U.S. Dollar index against other foreign currencies.
Hence the uptrend at the latter part of the graph.
In the end, with all the uncertainty surrounding the 'Pandemic-2020', investing in the U.S. Dollar was evidently the safer option for investors.
The Stringency Index was a short-term factor that affected the Forex Market.
Source Georgia Southern University.
Now, let's examine the other factor, unemployment.
Unemployment
In a webinar hosted by Refinitiv, Wilson Leung, chief market strategist at trading advisory firm, TrendsetterFX, among other things talked about the long-term effect of the Unemployment rate caused by the 'Pandemic-2020'.
It was concluded that the job losses as a result of the 'Pandemic-2020' skyrocketed, reaching new levels that were not even reached during the 2008 global financial crisis.
Below is a graph to support this fact.
To put it into the right perspective, Leung further explains that at the outset of the Great Depression in 1929, U.S. unemployment stabilised at 3.2%. A decade later, by 1938, it had risen to 19%.
He also stated that unemployment was not as badly affected during the global financial crisis; peaking in early 2009 at 9.9% in the U.S., and then steadily improving to a low of 3.5% in 2019 and into earlier this year.
But as you've rightly guessed, during the 'Pandemic-2020', more than 26 million Americans applied for unemployment benefits. Some economists, such as Justin Wolfers at the University of Michigan, calculated and estimated that unemployment was going as high as 13% and still rising sharply.
This long-term effect on the economy led to demand for the dollar to increase as investors searched for a safe-haven currency.
Conclusion
In conclusion, the ‘Pandemic 2020’ left an indelible mark on the forex market, particularly in the U.S.
The 'Pandemic-2020' underscored the importance of adaptability in the Forex Market, where investors and traders had to navigate the uncertain waters brought about by the crisis.
It also reaffirmed the status of the US Dollar as a preferred safe haven, with its value bouncing back as the situation improved.
In the end, the ‘Pandemic 2020’ demonstrated the interconnectedness of global events and financial markets, emphasizing the need for flexibility and vigilance in the face of unexpected challenges.
As the world moves forward, it's essential for market participants like yourself, to draw valuable lessons from the past and continue adapting to the evolving dynamics of the Forex Market.
