Currencies Plunge as Central Europe Shuts Doors to Fight Virus

The outbreak of the COVID-19 was unexpected. It has led to the plunge of various major economic sectors with foreign exchange being greatly impacted. It has been a decade since the world encountered a financial crisis in 2008 only to come to face another in 2020.

The three major categories of the economy that have been affected are demand shock, supply shock, and financial shock. There is still much that is yet to be discovered about the disease but at the moment once it gets a foothold, the next thing is all-out quarantine effort which in return results into a huge economic shock. Adverse effects of the spread of the virus are being witnessed in the US where there is a dramatic fall of the global stock prices.

Normally the central bank would leverage the situation by inflation and interest rates over 5 per cent. The rates would be cut respectively if COVID-19 hit global demand. Currency swings would be expected, however, there would be little cause for global economic tension depending on countries that have been hit hardest by the virus outbreak.

Unfortunately, we are still on a struggle to contain the situation. some major parts of the globe especially the eurozone, the interest rates have fallen to below 0%. In the US, policy interest rates started experiencing this crisis in a range of 1.5 to 1.75 %. Others like Mexico, with interest rates of 7 %, and Russia at 6% have hope for better days.

Currency Volatility as a Result of COVID-19

Stock markets and general business sentiment have taken a shift in productivity since the devastating outbreak coronavirus. As the number of new infections continues to grow each day, traders and investors are hurrying to dump stocks en masse, and short-selling options as they fear for the worst. Forex markets are the greatest beneficiaries of this global uncertainty.

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The Volatility Index (VIX) number has risen sharply, indicating increased fears in the financial markets which typically bodes well for safe-even commodities like gold and currencies like the JPY

The US Dollar rises and falls

On the onset of the virus, there was a positive result on the US dollar as it rose by 2%. From a meeting held by the Federal Reserve since the 2008 financial crisis, they realized a sharp fall of the dollar. The New Zealand Dollar and Australian Dollar are to in the most affected currencies as a result of COVID-19 pandemic. The following are currencies that have already begun losing value over the US dollar;

Mexican Peso (MXN)

The Mexican peso has reduced in value following global COVID-19 uncertainty. The loss in value has been accelerated by oil price volatility. The exchange rate has plunged 14%. The central bank of Mexico, Banxico has come in to reduce depreciation, however, it has few options of mitigation in the market. The currency is still under pressure because investors are pulling money from emerging markets.

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Russian Ruble (RUB)

The Russian economy is one of those that have been impacted by the coronavirus. The uncertainty has continued to shock traders around the world and has led to sharp volatility on the Russian stock markets and a shift in the value of the ruble. The Central bank is putting efforts to increase sales of the foreign currencies, on the other hand, the government has also pledged support to oil companies all amid to restore and stabilize the currency.

Hungarian forint

The Hungarian forint has hit low records of 2% versus the euro, on the other hand, the Czech crown fell by 3% following the COVID-19 pandemic. This was evident during a time when markets were pricing in potential central bank measures in Central Europe to ease the economic impact as a result of coronavirus pandemic.

Central banks around the world have cut rates and announced stimulus measures in recent days to try to ease the economic fallout from the spread of the coronavirus. The forint has been one of the worst performing currencies in the region and has dropped 1.7% this 2020 following COVID-19.

Hungarian central bank Governor Gyorgy Matolcsy said the country must accelerate publicly funded investment projects already approved, launch a fresh home-building program and focus on investments, consumption and lending to keep the economy going.

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The Pound is under pressure

 The number of COVID-19 patients is rising each day. This and the onset Brexit trade negotiations have led to a weaker pound. The Bank of England has also taken an emergency move to have the interest rates cut to 0.25%. This is another reason why the pound has fallen in value. This is not only in England but also in other countries which are following suit. The government has also put aside £30 billion in the budget to get the country through fighting the coronavirus outbreak.

Early March 2020, the government announced steps and moves that they are taking to curb the pandemic. In the meantime, Ireland among other countries has officially announced the closure of schools and other learning institution. Other measures in place include restriction to movement and limitations on mass gatherings. All these factors have a significant impact on the value of the coin and the economy at large

What is happening is what the Brazillian minister for finance, Guido Mantega, referred to as‘financial wars’. The currency manipulation to attain competitive gain, but divergences in monetary policy that lead to sharp foreign exchange movements, and threats of retaliation by those who lose out.

In conclusion, while the whole picture is getting dark, there is still some reason for economic hope. The current situation is different from the 2008 crisis because the shock is not as much in the financial sector.  It is less destabilising, and there is a chance of a quick bounce back. However, to achieve it in the economy, as in the direct fight against the disease, the world has to work together.

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