Among the various global financial markets like stock, bond, and the commodity market, the Forex market is the largest and most significant market in current times. With over $6.6 trillion worth of transactions taking place daily, the Forex market is the tool that causes the change in market trends and trade rates on a global scale. The US dollar is the official global currency. Hence, it is used as the currency to record and carry out transactions. The nature of the Forex market keeps changing with the values of different currencies, which gets used by many financial institutions and companies alike to make a profit on the trade of foreign currency.
When COVID-19 got declared as a global pandemic, the foreign exchange market and others were affected, which led to various outcomes like changing how foreign exchange took place and the question of what the future held for the Forex market. To understand this change, we must first understand Forex and the Forex market.
Table of Content:-
Forex and the Forex Market
The conversion of one currency to another for various purposes of commerce and trade is known as Forex. The word was derived from two words, foreign currency, and exchange which essentially means exchanging foreign currencies. These currencies are exchanged on a large scale by many industries, companies, and banks through online transfers that create a domain of currency exchange, and this domain is known as the foreign exchange market. The market is ever-active, with trillions of dollars of transactions taking place each day between financial entities worldwide.
The traders in the market range from individual brokers to central banks to multi-national companies to investors. These traders can control and alter the market with their decisions of buying and selling currency. The banks play the most vital role in the market, with a major part of trading that lies with them. These banks can be commercial and central banks that use the market to create reserves of foreign exchange for the country. These reserves act as financial security. The liquidity of the foreign exchange market helps the bank regulate funds easily to the public and owners while maintaining the normal courses of action of a bank.
The Functioning of the Trade
The foreign exchange market works more or less like the stock market, the difference being, this market functions at a much larger scale. The central and commercial banks influence most of the trading on the foreign exchange market. The multi-national corporations that exchange national currency for foreign currency have to do it through banks, as these corporations do not have direct access to the market. They use various types of trading inside the Forex market to make profits and plan for future growth through the trade. COVID-19 interrupted the future aspect of every business, therefore, affecting the functioning of the Forex market.
Two main markets within the Forex market are used for trading currencies, they are:
- Spot markets where two parties decide on a price based on various factors of demand and supply to exchange currencies.
- Forward and futures markets get used by two parties under contract to buy and receive foreign currencies at a pre-determined date and price.
The Impact on Trade
The currency rates and the spread of infections went hand in hand. The entire market runs on the values of national currencies as these currencies keep the value of their economy. But, when the pandemic caused a global lockdown, the economy of all the countries went down, with some countries going into recession. This caused a decline in the value of the national currencies. The trade went stagnant for quite a while, with a significant decline in the number of transactions.
The countries that showed improvement with decreased infection rates and improved recovery rates started to lift the barrier on economic activities that resulted in an improved country’s economy. The national currency value went up as a result, which meant that more countries could participate in foreign trade without expecting a huge amount of loss.
The slow but sure recovery for the foreign market has also resulted in overall stronger economies. There used to be quite a few reasons that could impact the foreign trade market, but the Coronavirus was unexpected adversity that the countries had to face and go through to get back to where they once stood.
The Boom of the US Dollar in the Global Financial Market
As countries came out of the recession-era, foreign trade saw an increase which meant more transactions. As these transactions are carried out in US Dollars, the value of the US Dollar increased compared to other countries, which meant an immediate benefit to the country’s consumers. They now had to pay less to buy commodities imported as the exchange rate directly influences the prices of the market.
The US also benefited since newer and stronger waves of the Coronavirus were constantly damaging the economy of the European countries, causing the value of EUR to fall to an all-time low. Other countries were also majorly affected by the rise in the US dollar’s value, and the sudden boom came as a surprise to other nations as a downfall in the value of the US Dollar had been predicted.
Despite the prediction of the downfall, external factors propelled the US Dollar to a higher value which is still increasing today. It has the potential to overtake the Euro and emerge as one of the strongest currencies globally.
The countries that were impacted are in the process of recovering from the effects of their currencies being depreciated as compared to the US Dollar. Their imports became more expensive, and they suffered losses on their exports. As the economy of the countries improves, the balance to the prices of trade would return.
Major Currencies that lost their value to the US Dollar in the Global Financial Market
Many of the competitors of the US Dollar in the global financial market had lost the value of their currency due to the COVID-19 pandemic. However, with the significant rise in the value of the US Dollar, some of them suffered massive losses; these countries faced the most adverse conditions or are at an all-time low value which is affecting the livelihood of people and the functioning of these countries:
- The Pound Sterling (GBP) fell to its lowest value in history after the number of infections in the country went up despite the efforts of the government to provide early vaccinations.
- The Mexican Peso (MXN) stands at an all-time low. With the prospect of becoming a petroleum exporting country failing and the pandemic shutting down the rest of the economic activities, the currency has fallen into a deep pit.
- The Zimbabwe Zimdollar (ZWL) has probably taken the most significant decrease in its value than the US Dollar, nearing 80%; the country faces no relief in currency appreciation.
- The Indonesian Rupiah (IDR) suffered a massive hit when the bonds of the Indonesian government were dropped by the foreign investors when they saw the initial decline. The value of the Rupiah is the lowest it has ever been.
- The New Zealand Dollar (NZD) played an important role in the foreign exchange market as it gained major value through tourism revenue which came to a halt after the spread of the Coronavirus and led to the downfall of the currency.
However, there is one currency that managed to gain value against the US Dollar in the global financial market. The Myanmar Kyat has been gaining value constantly as US dollar demand got reduced instead of increasing due to the shortage of imports and exports.
The Future of the US Dollar in the Global Financial Market
The foreign exchange market holds lesser risk than various other global financial markets of trade which is bound to attract more people to dive into foreign exchange. It is a possible outcome due to the large amounts of disposable income gathered in lockdown by people and their want to explore and invest in new ventures. The Forex market is dynamic and is developing new features daily faster than before the pandemic.
These developments will help the other countries gain profits on trade and allow new countries to join the global trade. The USD has easily played the role of the underdog during the pandemic and managed to prosper. Due to the massive gain in the value, the trend is only set to increase as countries’ situations get better and widespread options of trade are made available to the organizations. The massive participation will also result in better handling of situations that may arise in the future, like the COVID-19 global pandemic.
The US Dollar in the global financial market has held ground up until now and will continue doing so no matter how much the market changes or external factors get in the way of the currency’s value. The other countries may eventually come close to the value of the currency, but they will not overtake the standard set by the US Dollar.