A Weak US Dollar and Other Currencies

Since last March 20, the US dollar index has decreased by 9.6%. It means money flows from the US to other countries. Traditionally, a weakening US dollar shines the emerging market investments. Therefore, many financial experts have shown positive views of emerging markets.

However, I thought that the current currency trends could be different from the other times due to coronavirus. In order to validate my idea, I made two groups, A and B groups. Countries that succeeded in containing coronavirus and made reasonable economic relief packages are included in A group. Meanwhile, Countries showing the highest new coronavirus cases are put in B group.

Then, I compared the countries’ currencies in the two groups to the US dollar index. I used the two periods: from March 20 to August 28 (from the peak to now), From May 28 to August 28 (3 months).

The result was impressive. Group A currencies’ movements are generally similar to the US dollar index trend. New Zealand that declared the pandemic eliminated has the strongest currency position among them. However, CNY(China) does not benefit even though the country ended this pandemic earlier than other countries. That is probably because of the trade war or the Chinese government’s currency control power.

The Euro value also has increased by 10% from the peak. I assume that the biggest reason is that Germany, which is the largest market, is well managing the pandemic. Furthermore, European countries recently made a coronavirus fund to support damaged countries such as Italy and Spain. This policy should support the European economy effectively.

However, B group countries’ currencies have had different movements, even though many traditional emerging market countries such as India and Brazil belong to this group. Even Peru and Turkey’s currencies have weakened from peak time. Most currencies in this group have not recovered from the peak time yet. However, since three months ago, the five currencies’ values have declined again.

What do those data indicate to us? First of all, the traditional narrative about a weak US dollar does not work at this time. Many iconic emerging countries are struggling with a strong US dollar because their currencies’ values have tanked. It means money does not flow from the US to B group countries. Furthermore, money has been leaving B group countries. If this situation continues, some of B group countries will become the default.

Secondly, coronavirus affects the global currency market based on the market system. Money has been going to safe places from coronavirus because the countries could make relatively good economic growths. If the current pandemic continues, A group countries may have some benefits. However, if A group countries fail to contain the virus, they also can suffer, such as B group countries.