Throughout the turmoil that has plagued financial markets during the great virus crisis, demand for safe-haven currencies has soared. They include the US dollar, which is the world’s reserve currency, as well as other traditional harbours of safety, including the Swiss franc. But for how long will these currencies remain so strong?

We expect the global economy to begin a gradual healing process as the number of new infections recedes, social distancing measures are relaxed and stimulus measures begin to take effect. Upward pressure on safe-haven currencies should then begin to fade. We believe there is a good chance of this beginning to happen, albeit at a measured pace, relatively soon for two main reasons.

First, the gradual return of an appetite for risk in financial markets is unlikely to rely solely on the absolute strength of the recovery – which is likely to be moderate and uneven at first – but on whether there’s continued improvement in a relative sense from the lowest point in economic activity. Second, the coordinated monetary and fiscal stimulus measures are on such an unprecedented scale that we believe they will facilitate a return to growth.

Currencies that are perceived to be safe havens have appreciated during the coronavirus pandemic and will probably fall back slightly as the appetite for risk returns to financial markets.

The dollar has been strong for many years now and strengthened further during the coronavirus pandemic. As the global economy begins to recover, these short-term upward pressures should begin to fade. Over the longer term, a number of factors could combine to weaken demand for the US dollar, causing it to depreciate gradually against other major currencies.

One of these relates to crude oil, which is likely to rise in price as the pace of global economic growth picks up and demand returns. In turn, this will increase the supply of ‘petrodollars’ to oil-exporting countries. The impact is likely to be a reversal of the marginal increase in demand for US dollars caused by the recent fall in oil prices.

Meanwhile, the US Federal Reserve’s (Fed) stimulative monetary policies are putting downward pressures on the greenback. Notably, the huge asset purchase programme (a form of quantitative easing) will increase the Fed’s balance sheet and increase the supply of US dollars relative to other central bank efforts.

The relationship between America and China became more relaxed at the start of 2020 after they signed a phase one trade deal. Yet tensions have flared again between these two superpowers during the coronavirus pandemic. China’s financial markets are likely to remain vulnerable to any setback along the economic recovery, as well as ongoing trade tensions.

The renminbi will continue to be driven by trade policy developments, including how closely America and China stick to their phase one commitments. It’s possible that President Trump will not want to stoke tensions further during an election year, which could put further downward pressure on the US economy. But, equally, a more tangible escalation remains a risk and may well take place.

We believe that over the longer term, the relationship between the two countries will remain complex. They are unlikely to reach a definitive agreement on trade, and China may find it difficult to meet its agreement to buy an additional $200 billion in US goods and services. Whenever the dispute escalates, the renminbi could face downward pressure as the flow of capital and goods slows.

Looking beyond the near term, although currencies are difficult to value, the equilibrium exchange rate is a popular measure, which incorporates various economic factors into the calculations, including inflation, trade flows and productivity. It tends to provide a guidance on the long-term trajectory for currencies, which suggests sterling is no longer undervalued against the euro.

The UK faces the same uncertainty as the rest of the world as the process of economic recovery begins, but the government’s policies should support sterling. The pound’s value will largely be a reflection of confidence in the country’s economic outlook, which will depend to a large extent on the UK’s future trading relationship with the EU.

After formally leaving the European Union (EU) on 31 January 2020, the UK is working through an 11-month transition period, which is meant to give both sides some breathing space while they negotiate a new free trade deal. We believe a partial agreement is possible but not yet a done deal and, as the 31 December deadline approaches, sterling will become volatile and probably depreciate.

One of these is how to apply common monetary and fiscal policies without constraining individual nations, given the wide disparity of economic conditions across the region. If successful then the fundamentals would support a stronger euro. That includes a twin surplus in its primary budget balance and current account, along with low and stable inflation.

In the shorter term, we believe the euro could appreciate slightly against the US dollar over the rest of 2020 as the global economy recovers and investors rediscover their appetite for risk. Any signs of closer monetary and fiscal integration across the region should boost the euro further.

Concerns remain about the long-term prospects for the euro area owing to the lack of fiscal integration, as well as weaknesses in some aspects of the monetary union. Can the 19 countries that share the euro work through their differences and resolve the numerous economic challenges the region faces?