HomeTwo Sides of the USD Coronavirus Story

Two Sides of the USD Coronavirus Story

18 August 2020 By Mircea Vasiu

The US dollar is not the same currency for all countries. When trading the foreign exchange market, what matters is to know where a currency pair goes, not where one single currency does. 

For instance, suppose you are  short USD. Judging by how much the Fed is out-printing the ECB, EURUSD bulls have a point when bidding for the pair. But that is just one currency pair that reflects the EUR strength or weakness in terms of USD. It compares two economies and how the central banks and governments reacted lately.

But not all economies are equal, just as not all currencies are equal. Hence, even over similar periods, a currency might underperform against a basket of currencies, while overperforming against another.

Introducing the 2020 USD.

The USD vs. G10 Currencies and Emerging Markets Currencies

Economists often use the term of developed and emerging markets to differentiate between different countries’ economic stance. It makes sense from all points of view.

G10 economies are often quoted as the leading developed countries. Their currencies compete both against their peers, but also against the emerging market currencies.

As a result of the higher volatility in the political landscape in emerging markets, their currencies fluctuate more against the G10 currencies. That is particularly true in the case of the USD, the world’s reserve currency. Why?

First, most of the emerging markets’ debt is denominated in USD.  Moreover, emerging markets keep issuing debt in USD.

Second, emerging markets’ households use the USD when trying to protect the value of their assets from inflation. In countries like Brazil, Turkey, or Russia, the likelihood is that you will see USD bills on the street, rather than Euros or any other fiat currency belonging to the G10 countries.

Five months into the coronavirus crisis, and we see different faces of the USD. On the one hand, it falls dramatically against G10 currencies.

The EURUSD, GBPUSD, NZDUSD, AUDUSD – they all moved in a bullish trend since the crisis started. Also, the USDCHF, USDCAD, or the USDJPY fell too. The reaction reveals a weak USD trend against all G10 currencies, making the crosses that belong to these majors to stay in a tight range (e.g., EURGBP sits in a very tight range close to the 0.9 level for more than two months now).

On the other hand, the same USD surges against emerging markets’ currencies. This is particularly visible in the Turkish Lira’s case.

FX interventions are not that common in the G10 countries. However, it happens for the Swiss National Bank to intervene from time to time to slow down the CHF appreciation.

FX interventions are quite common and frequent in the emerging markets. Therefore, when trading the USD against developed or emerging countries’ currencies, think of the time horizon of an investment and the active market players.

And do not be surprised if the USD performs differently. It often does so.

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