Next came Europe, notably Italy and Spain. Then, the pandemic spread to the US. In terms of sequencing, the US economy initially outperformed the rest of the world this year, and consequently, the dollar appreciated against most currencies as well.
So far, this has been a volatile year for financial markets, and the currency markets have been no exception. The US dollar advanced nearly 9% in the first quarter before giving back almost two-thirds of its rally as of the middle of August. After declining nearly 5% at one point in the first quarter, the euro is now up 11% from its March lows. The Australian dollar fell 18% in the first quarter and has since rallied 25%. The Mexican peso fell 27% in the first three months and has since rallied 15%. Unlike developed market currencies, emerging market currencies, in general, have not yet recovered their losses. As far as what may drive the US dollar going forward, there are both shorter-term and longer-term factors to consider.
Before looking forward, it is important to understand the factors that influenced currencies, particularly the US dollar, in the first half. The dollar’s first quarter rally was driven by four factors. The first factor was the path through which the pandemic impacted the world. China was hit first, then South Korea, and their economies were the first to slow.
