words Al Woods
There are a number of things that have been observed during the coronavirus outbreak, including widespread job losses and the declining value of national currencies.
The latter point is particularly interesting, as this has emerged following a number of quantitative easing measures and ongoing local lockdowns. This was borne out recently, when the value of the British pound declined following the decision of Boris Johnson’s government to introduce new social distancing measures nationwide.
In this post, we’ll look at how the pandemic has impacted on currencies and similar asset classes across the globe, while asking why fiat currencies in particular have declined in value throughout 2020.
Covid-19 and Currency Values – The Story so Far
There’s no doubt that the Covid-19 outbreak has had a huge socio-economic and financial impact, from the perspective of everyone from households and investors to business-owners.
Even the world’s leading technology stocks have been negatively affected, as the global stocks have experienced both peaks and troughs following the crash in March (when it was revealed that Covid-19 represented a global pandemic).
Similarly, the coronavirus has also driven down the global demand for oil, forcing the OPEC organisation to recommend cuts to production in May and June. Ultimately, OPEC suggested that member nations reduced their output by 23% during this period, in order to cope with plummeting oil prices across the board.
In terms of currency, Boris Johnson’s recent announcement has seen the pound come under renewed and heavy selling pressure.
Make no mistake; this is compounding the existing challenges being posed by Brexit and the government’s monetary policy (we’ll have a little more on this later), with the GBP losing ground against both the Euro and the greenback.
This is according to the research team at Tickmill, which has been charting the fluctuations in the pound and a raft of other major currencies ever since the end of Q1.
Why is Covid-19 Undermining the Value of Currencies?
Even on a fundamental level, the impact of Covid-19 has indirectly undermined currency values, largely due to the monetary policies and stimulus measures rolled out by governments across the globe.
More specifically, quantitative easing measures often see central banks slash the base interest rate as a way of managing potential inflation rises. However, a consequence of this is that the domestic currency becomes less appealing to overseas investors, causing its value to decline against the backdrop of reduced capital inflows.
This has even impacted on the US dollar, which actually performed well during the first half of 2020.
However, the impact of a $2 trillion stimulus package has gradually weakened the dollar, creating a scenario where even the ailing pound has begun to make gains against the greenback at the beginning of the week.
This trend has been felt across the world at different times during the pandemic, with the currencies such as the South African rand and the Mexican Peso all declining at times when infection levels reached their peak and stimulus measures were introduced.
Given the continued risk of a secondary wave of infections and further lockdowns, there’s little sign that this trend will abate anytime soon. In fact, the US is already mulling over the terms of an additional stimulus package for Q4, creating a potential period of further decline for the usually dominant dollar.
Arguably, the only solution to ailing currencies is the development of a formal vaccine, although this most likely remains months away from being available to the public.