With the United States and its financial hubs fast becoming the new epicentre of this current global COVID-19 crisis, industry pundits are questioning the USD’s long term status as a safe haven currency. One recurring question is whether the Dollar will continue to appreciate in value during times of global crisis as history has demonstrated. Or will the impact of Coronavirus on the USA economy ultimately see a depreciation of the Dollar? This article examines why the US is viewed as a safe haven economy, and whether the effect of the storm brewing in the US could change the norm.
Why is the USD a Safe Haven?
Often the USD is typically viewed as the gold of the currency world – a safe haven that in volatile markets, investors and currency traders look to convert holdings of cash into USD for protection. This is because the Dollar is the world’s reserve currency and the default denomination used to peg against all major commodity prices, along with international business deals.
USD Performance During COVID-19
Since the outbreak of Coronavirus the USD has largely appreciated. According to the US Dollar Index –which measures the greenback’s value against a basket of other currencies – the Dollar has gained 6% since its lowest point reached in early March. It has also seen minor gains against most major currencies along with significant growth against commodity currencies (given the collapsing oil prices). It has also seen gains due to increased demand from emerging markets caused by the crisis.
The Effect on the US economy
With some economists predicting the impact on GBP growth from COVID-19 to go into double digits, the impact on the US economy could be substantial. To put it into perspective, that is at least double the impact on GDP growth following the 2008 global financial crisis.
The Financial Times reported Wednesday 8.4.20 that the income of 73% of the US population has been hit by the crisis and last week with more than 6.65 million people filing for unemployment benefits – a devastating economic impact of the pandemic on the American economy. This impact is an important indicator of the American economic battle line descriptors ahead. The large middle class (including small businesses) in the US representing the backbone of the economy will need to rebuild. This could be a drawn-out process which could result in a depreciation of the Dollar.
Impact on the USD
With the economy tipped for turmoil over the next 6-12 months, some pundits believe that the USD may start to decline and be more susceptible to volatility, as the country experiences the effects of this crisis. Investors have been betting that the global recession will be deeper than the US downturn. But the reality is the impact from a data perspective is beginning to surface, which could mean the opposite result to investors’ original predictions.
Yes, economists are questioning the US Dollar’s safe haven currency status. But we do not believe the status is under threat. During the 2008 financial crisis the USD strengthened by 22% and although the recent moves have not been as large the USD is the biggest winner in the current climate. Given the importance of the USD as a transactional currency for commodities, a safe store of value, as well as demand for US treasuries remaining high, the fears of a global recession will continue to make it a first choice amongst investors. The USD is still the world’s reserve currency by some margin and it would take a seismic shift in the global economic landscape to see the Dollar plummet.
The view from our FX experts is that the USD will remain a safe haven for the foreseeable future.