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March 15, 2023

COVID’s Impact On FX and Global Currencies

A Black Swan Descends on the World and Shakes up FX

With virtually no warning, the COVID-19 pandemic rapidly spread from China to every corner of the world in less than six months, quickened by the ease of global travel. COVID has devastated human life and the global economy, the effects of which are still reverberating worldwide. COVID-19 was a black swan event—a term used to describe an unpredictable event with severe consequences.

COVID’s Impact On FX and Global Currencies

Effects on the FX Market

COVID-19 sent shockwaves through the global FX market, not felt since the 2008 financial crisis. The first effects of COVID-19 on FX markets were as unpredictable as the pandemic itself. The dollar (DXY) dropped, rallied, then dropped again during the initial phases of the pandemic. Foreign exchange is always about the relative value of one currency against another, so this “whipsaw” effect was clear evidence that the markets could not determine how the pandemic would affect countries and economies in relative terms. 

Starting in May 2020, the dollar began to decline until January 2021. The Fed (U.S. central bank) lowered interest rates to near zero. The U.S. was also experiencing a COVID-19 mortality rate higher than most other industrialized nations, adding to a lack of confidence in the dollar. The dollar lost over 12% against a basket of major currencies during this period. However, in the summer of 2021, the world faced mounting global financial instability, setting the stage for one of the most meteoric rebounds in modern economic history. This move accelerated when the Fed began to raise interest rates in March 2022. The DXY is now up nearly 25% from the 2021 low

The Infamous Black Swan

COVID-19 was a classic black swan event, disrupting all aspects of the global economy, including currencies. The effects of the pandemic clearly illustrate the importance of hedging “tail risk.” If this type of event could result in an existential threat to your business, you should consider implementing a survival strategy.

The dollar’s moves during COVID-19 were largely unpredictable. For currency movement to be predictable, it usually implies comparing a current situation to historical precedent. There wasn’t a precedent for COVID-19 because the last global pandemic occurred over 100 years ago, long before modern FX markets.

The dollar ultimately emerged from the pandemic as the strongest currency in the world. Companies that failed to take action have experienced enormous losses in foreign assets and cash flows. But hedging could have prevented most of the damage.


  • Expect the unexpected. We aren’t sure when the next black swan event could occur, but the world has experienced global and regional black swans on average every two years since 2000. It’s a question of when—not if.
  • By definition, no one knows the timing, but recent changes in global monetary policy (the end of cheap money) will almost certainly expose structural weaknesses in countries’ economies. Many analysts expect something to break, leading to a chaotic market reaction.
  • Companies that want to thrive over the next decade need to be ready with hedging strategies.


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