Also, the European Central Bank (ECB) and the Federal Reserve Bank (FED) announced generous stimulus packages both for the European Union and the US economies, respectively, setting at the same time their interest rate targets close to zero, in an attempt to minimize the effects of the “lockdowns” to the overall economic activity. Analytically, many major stock markets around the world have lost almost 20% of their initial value (Segal & Gerstel, 2020). The second pillar involves the impact of the pandemic on the financial markets, in general, and on stock markets in particular. On top of that, one should take into consideration the fact that political events have contributed to the increase of the volatility of crude oil prices, yielding an unprecedented drop in the price of oil, leading countries such as Saudi Arabia and Russia to take political measures to control the situation (Albulescu, 2020). The first pillar involves the “lockdown” and isolation measures undertaken at a global scale by the respective governments of most economies, which have an immediate impact on their trade relations, since the total volume of trade was estimated to decrease approximately by 13%–32% in 2020, based on official projections by the World Trade Organization (Trade Forecast Press‐Conference, April 2020). The impact of the recent pandemic on the global economy can be roughly categorized into three major pillars. However, the increased globalization and integration of trade and financial relations, among the various economies and institutions, makes clear that the global shock caused by the pandemic is tremendous (Lee & McKibbin, 2004).

In an attempt to minimize the spread of the virus, most economies and policymakers have taken extreme lockdown measures that negatively affect the overall microeconomic, macroeconomic, and financial conditions of each economy. The total confirmed cases are estimated to be several million people globally, showing the cruel face of this pandemic (World Health Organization, 2020). The spread of the SARS‐COV‐2 virus in a worldwide context has caused fear globally. The Covid‐19 pandemic has spread from one country to another, having its origin in Wuhan, Hubei, China (Liu, Gayle, Wilder‐Smith, & Rocklöv, 2020). Based on our findings, the duration of the high volatility state in the Covid‐19 era has doubled, from almost 3 to approximately 6 days, compared to the pre‐Covid‐19 era, whereas the high volatility state in the Covid‐19 era is characterized by a statistically significant higher range of volatility compared to the pre‐Covid‐19 era. Also, to investigate the potential shifts in the regimes of the euro to dollar exchange rate, we formulate a Markov‐switching model with two regimes, based on the determinants that have been found in the previous step.

Based on our findings, the Covid‐19 pandemic has indeed significantly changed the determinants of the euro to dollar exchange rate.

To do so, we make use of spectral non‐causality tests to uncover the determinants of the euro to dollar exchange rate, using data that cover the pre‐Covid‐19 and the actual Covid‐19 era, by considering the exchange rate movements of other currencies, the stock market index of S&P 500, and the price of oil and gold, as well as their realized volatilities. In this paper, we analyse how the Covid‐19 pandemic changed the dynamics of the euro to dollar exchange rate.

Euro exchange rate to dollar