COVID-19 pandemic and the exchange rate movements: evidence from six major COVID-19 hot spots

The study’s primary objective is to unravel the nexus between the COVID-19 crisis and the exchange rate movements in the six major COVID-19 hot spots—Brazil, China, India, Italy, Turkey, and the United Kingdom. The impact of the COVID-19 deaths on the Rupee/USD, Pound/USD, Yuan/USD, Real/USD, Lira/USD, and Euro/USD exchange rates is analyzed by using the panel ARDL model. The COVID-19 deaths are used as a proxy for market expectations. The panel ARDL model showed a unidirectional long-run causality running from the COVID-19 deaths to the exchange rate. In fact, the coefficient of COVID-19 deaths is positive and significant in explaining the exchange rate(s) in the long run. This result meets the a-priori expectation that a rise in COVID-19 deaths can depreciate the sample countries’ exchange rates. The reason being, the ongoing COVID-19 pandemic has changed the market expectations of the financial market participants about the future value of exchange rate(s) in the major COVID-19 hot spots. Therefore, countries experiencing a sharp daily rise in COVID-19 deaths typically saw their currencies weaken.