The 2020 outbreak of the novel coronavirus (COVID-19) created a financial environment driven by angst and trepidation. COVID-19 panic swept the globe, placing the world’s capital structure under extreme pressure. The result was consistently high volatilities in the commodity, equity, currency, and debt markets.
To combat the economic fallout, the U.S. Federal Reserve (FED) took action. The FED cut lending rates to zero and rapidly instituted a sweeping quantitative easing (QE) program. Although these measures were initially unsuccessful in checking stock market volatility, the impact on the U.S. dollar (USD) was profound. As we move into the post-coronavirus era, it will be exceedingly important to monitor how the USD reacts to an unprecedented financial dynamic.
COVID-19 and the FED
Although COVID-19 originated in Wuhan, China, in December 2019, the virus didn’t begin its assault on the markets until late February 2020. Following Feb. 22 and 23 reports that the contagion was spreading through Italy, world stock markets plunged. Unfortunately for buy-and-hold equities investors, the Feb. 24 crash of 1,000 points (-3.5%) in the Dow Jones Industrial Average (DJIA) was only a preview of things to come.
Beginning on March 3, the FED led the battle against the COVID-19 financial crisis:
- March 3: The FED cut the Federal Funds Target Rate by ½ point in an emergency policy adjustment.
- March 12: Chairman Jerome Powell announced that the FED would inject $1.5 trillion into the financial system. The action sought to ensure liquidity via overnight interbank lending mechanisms.
- March 15: In a surprise move, the FED announced another emergency rate cut, this time by a full percentage point. With the Federal Funds Rate now at 0 percent, Chairman Powell stated that the FED was going to “go in strong” on asset purchases. Accordingly, a minimum of $700 billion in assets was to be purchased by the FED over the coming months.
- March 23: The FED took unprecedented action, launching a sweeping quantitative easing program. Nicknamed “QE Infinity,” the FED was to purchase assets indefinitely “in the amounts needed.” This policy move left the central bank free to extend QE by any means necessary.
Ultimately, the FED decided to launch preemptive policy strikes against the coronavirus economic fallout. The path of aggressive rate cuts and QE was largely based upon the actions taken during the global financial crisis of 2008.
The USD’s Reaction
As the world’s reserve currency, the USD is much more than a conduit for exchange. Depending on economic circumstances, it may function as a speculative tool, mode of investment, or financial safe haven.
As the coronavirus became a primary market driver, the FED’s actions brought a unique set of conditions to the USD’s valuation. During the initial stages of the outbreak, the greenback lost value as the foreign exchange markets (forex) priced in expected rate cuts and QE. However, once COVID-19 reached pandemic proportions, investors turned to the USD as a safe haven. The end result was wide trading ranges for the world’s major currency FX futures contracts between March 1 and 20:
| Contract (2020) | Base Pair | High-Low | Gain/Low (Approx.) |
|---|---|---|---|
| June Euro FX | EUR/USD | 1.15305-1.07790 | -3.7% |
| June British Pound FX | GBP/USD | 1.3161-1.1475 | -7.1% |
| June Australian Dollar FX | AUD/USD | 0.6680-.05703 | -11.5% |
| June Swiss Franc FX | CHF/USD | 1.0910-1.0180 | -2.5% |
| June Canadian Dollar FX | CAD/USD | 0.75075-0.68290 | -6.4% |
High volatility has defined the currency markets throughout the COVID-19 pandemic. Subsequently, the USD has emerged as a pillar of stability. Despite FED rate cuts and extensive QE, the greenback has become a hot commodity among individuals and institutions alike.
Interested in Trading FX Futures?
The lineup of currency futures products available on the Chicago Mercantile Exchange (CME) furnishes traders with a variety of ways to trade the USD. Whether as a hedge against the unknown or as speculative vehicles, FX futures can be a valuable part of your portfolio. To learn more about how this exciting asset class can help you achieve your financial goals, schedule a free consultation with a Daniels Trading currency market specialist today.
