COVID-19’s Influence on Exchange Rates

  • 28 Oct 2020
  • By Blu Putnam

The interplay of the evolution of the COVID-19 virus as it spread across the world with the dynamics of exchange rates has been fascinating to observe. With exchange rates, there are no absolutes and everything is relative, and that is exactly how it worked with the virus. Countries seeing sharp daily rises in new COVID-19 cases typically saw their currencies weaken. When countries made progress containing the spread of the virus, that often set the stage for currency strength.

From the perspective of fundamentals, the influence of the virus on currency markets worked its way through the channel of changing relative expectations of future economic growth. Countries with healthy economies have the ability to attract global capital flows, and capital flows are an important driver of exchange rates. When the virus first hit a country or region hard, economic growth expectations would be downgraded in fear that parts of the economy might need to be shut down. By contrast, as a country gained better control of the virus and daily new cases declined, optimism about the re-opening the economy took control of the market narrative. To illustrate our analysis, let’s take two exchange rate cases relative to the US dollar – Chinese yuan and the euro – from the pandemic of 2020 to see how this analytical framework helps to explain some of the currency moves that were observed.

We will start with the Chinese yuan. The virus started in China early in 2020. The city of Wuhan and the province of Hubei were almost entirely shut down for a month and both domestic and international air travel were highly restricted. Not surprisingly, expectations about Chinese economic growth tumbled while US was still not impacted by the virus. The Chinese yuan initially weakened during the early stages of the pandemic through the end of May. From June onward, though, it became apparent that China had made progress in controlling the spread of the virus. The economy came back strong, which can be observed in the comeback pattern of domestic air travel. Simultaneously, in the summer of 2020, as China was experiencing its economic rebound, the US economic expectations were hit by a second wave of the virus as it spread through Sun Belt of the country. The relative juxtaposition of the virus being contained in China and still spreading in the US was part of the reason why the Chinese yuan rallied strongly in the July-September period. The Chinese currency rallied from 7.16 yuan to the US dollar in late May to 6.75 yuan/US dollar at the end of September 2020, about a 6% gain.

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Now let’s consider the case of the euro, which was initially weak against the US dollar when the pandemic began. Europe, especially Italy, was hit hard before the virus came to the US. Then, from a low point on March 20, the euro rose over 10% through the end of August versus the US dollar. The euro rally was halted, however, not by a policy announcement or any new economic data release. What halted the euro’s rise was the growing evidence of a second wave of the virus taking hold in Spain and France, among other countries, which was expected to negatively impact the economic rebound.

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We have to caution; timing matters a lot. The currency markets may take a few weeks or a month to focus on the changing narrative of how one country may be improving its control of the virus and another country is losing ground. Also, there is much more happening in the currency world than the evolution of the pandemic. Policy shifts still matter, as do political risks. For the pandemic of 2020, though, tracking the relative progress of the virus was critical to understanding currency movements.


All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author(s) and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

About the Author

Bluford “Blu” Putnam has served as Managing Director and Chief Economist of CME Group since May 2011. With more than 35 years of experience in the financial services industry and concentrations in central banking, investment research, and portfolio management, Blu serves as CME Group’s spokesperson on global economic conditions.

View more reports from Blu Putnam, Managing Director and Chief Economist of CME Group.

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