In normal times, a 1% daily change in the value of the dollar against the euro or the British pound would be a big move. These are not normal times.

The $6.6 trillion-a-day foreign exchange market has experienced dramatic swings similar to those seen on stock exchanges or oil markets in recent days as panicked investors react to the global coronavirus pandemic by dumping everything in exchange for the greenback.

The British pound fell by around 4% against the all-conquering dollar, hitting a 35-year low, Wednesday while Norway’s krone slumped by a staggering 7%. The pound clawed back a bit of lost ground but it's still trading at Thatcher-era levels.

In times of tremendous turmoil, the rise and fall of currencies become a proxy bet about the fate of nations. Investors bid up the currencies they believe are best positioned to win a war, or, in this case, a global pandemic that's infected more than 300,000, killing more than 13,000. This time around, that can explain only part of the dollar's surge.

The dollar is rising inexorably as investors flock to a trusted safe haven while the currencies of countries perceived as more risky, such as Britain, which is trying to negotiate a post-Brexit trade deal with the European Union at the same time as it must deal with the devastating economic fallout of the coronavirus outbreak, take a beating.

The currencies of oil producers are also being hit after Saudi Arabia and Russia failed to agree on a new oil production-limiting agreement this month, opening the way to an oil price war and a flood of crude just as demand has collapsed because of coronavirus. The euro, strong against most other currencies, hit a three-year low against the dollar last week.

The currencies of many emerging market countries are also under pressure.

The U.S. dollar index, which tracks the U.S. currency against a basket of other currencies, has risen 8% in the last 11 days, hitting a three-year high.

Fear factor

So what is driving the dollar’s persistent strength? In a word: Fear. The coronavirus panic has gripped investors so tightly that they are fleeing risky assets. The price of gold, usually perceived as the ultimate safe haven, has dipped in the last two weeks and even normally safe-as-houses U.S. Treasuries have sold off on some days.

Investors and businesses want cash, and what better cash to hold than the dollar, the world’s leading reserve and trading currency? Foreign companies and governments need dollars to pay off debts in the U.S. currency.

All this has led to a shortage of dollars, or a liquidity problem, which has magnified daily moves in the foreign exchange markets.

“People are just short of dollars and buying them really at any cost because they are going through situations where—especially more at the investor level—they have to deleverage or de-risk and get to benchmark. So anything that is short of dollars and long some sort of higher yielding currency or emerging market instrument, that’s just being unwound. That puts pressure on the dollar, so you get the moves that are as extreme as we’ve seen this week happening,” says Tim Graf, head of macro strategy EMEA at State StreetGlobal Markets.

“And also just generally, financial markets are dislocated in equities, in bonds, you have trading desks working split sites and therefore the communication isn’t as good, the liquidity isn’t as good and that goes for currencies too,” he told Fortune.

The liquidity factor

Premiums paid by investors to swap their currencies for dollars surged last week, reflecting the strong demand for the U.S. currency.

The dollar is rising not so much because “the U.S. is the most attractive economy in this environment, although it probably has that appeal still relative to say Europe or Japan,” Graf said. It was also partly due to “the plumbing of the financial system.”

Overseas banks had a lot of dollar liabilities on their balance sheets while governments and companies in emerging markets issued a lot of dollar-denominated debt, Graf said. At times of market stress, such as now, emerging market currencies depreciate, which in turn increases their dollar funding liability. That leads to currency swap markets, which are used to borrow dollars short-term to cover those liabilities, getting really stressed, Graf says.

“When those markets get very stressed, oftentimes it doesn’t necessarily lead to direct pressure on the spot market, but right now it is,” he said.

The liquidity crisis was aggravated by fears that London, the world’s leading foreign exchange dealing hub, could be “locked down” as part of official measures to contain the coronavirus outbreak. The government has played this down, saying there will be no limits on movement.

Winners and losers

The dollar is up 15% against the Russian rouble since the OPEC+ agreement broke down on March 6 and up by 11% against the British pound since March 9. It's up 28% against the Mexican peso and 8% versus the Canadian dollar since mid-February.

The Australian dollar slumped to a 17-year low against the U.S. currency last week on fears that its exports of coal and iron ore will be hit by global recession and falling Chinese demand.

The Japanese yen and Swiss franc have been among the few currencies to hold their own against the dollar, as they are also seen as safe havens in a crisis. China’s managed currency has traded in a tight range even though the coronavirus outbreak originated there.

Pros and cons

A strong dollar makes U.S. exports less competitive in overseas markets while making imported goods cheaper for Americans. It's a potential win for consumers and drag for America's multinationals, particularly the finance sector.

The dollar’s strength could put further downwards pressure on inflation which has persistently undercut the Fed’s 2% target.

Graf says that’s a problem. “For the U.S., it’s problematic in the sense that the U.S. has an inflation target … (A strong dollar) suppresses U.S. inflation through the trade channel.”

A surging dollar was “detrimental potentially for the U.S. economy and for U.S. nominal growth and particularly U.S. inflation,” he said.

“It’s detrimental really, in this episode, far more for the financial system because a strong dollar basically throws sand in the gears of the financial system whereas the Fed is trying to grease the gears of the financial system. And the dollar really complicates that because global trade is still heavily invoiced in dollars. Therefore global trade finance is transacted in dollars. So a stronger dollar just makes it more complicated for pretty much every global supply chain of significance,” he said.

Fed action

The Federal Reserve has acted to ease the dollar shortage abroad. The Fed and the European Central Bank, plus the central banks of Canada, Britain, Japan and Switzerland, announced coordinated action last Sunday to provide greater liquidity by lowering the pricing of existing U.S. dollar liquidity swap line arrangements.

The swap lines enable other central banks to receive U.S. dollars from the Fed in exchange for an equivalent amount of their currencies provided to the Federal Reserve. All economies need ready access to dollars, the de-facto global currency.

On Thursday, the Fed announced it was setting up similar U.S. dollar liquidity arrangements with the central banks of Australia, Brazil, Denmark, South Korea, Mexico, Norway, New Zealand, Singapore and Sweden. The central banks can then supply those dollars to commercial banks in their countries, which can pass them on to customers.

Graf said these swap lines were starting to ease the stress in the market.

“In aggregate, the dollar swap market looks a lot healthier today than it did say two or three days ago. It’s not quite back to normal. Why it has improved specifically in the last day or two is those swap lines have been opened to other central banks beyond the Bank of Japan, ECB, the Bank of England … The more they expand the scope of swap lines to include emerging market central banks, the better this will get because that’s exactly what happened in the crisis of 2008,” he said.

Could the U.S. weaken the dollar?

For decades, the U.S. has had a strong-dollar policy, believing that its role as a reserve and investment currency requires it to be stable. But President Trump is no fan of the strong dollar. In August 2019, he tweeted: “As your President, one would think that I would be thrilled with our very strong dollar. I am not! The Fed’s high interest rate level, in comparison to other countries, is keeping the dollar high, making it more difficult for our great manufacturers like Caterpillar, Boeing, John Deere, our car companies, & others, to compete on a level playing field.”

There has been speculation that the U.S. and other central banks could join together in coordinated foreign exchange market intervention to weaken the dollar much in the same way that the Group of Seven major economies banded together to weaken the yen after the 2011 tsunami in Japan.

The Norwegian central bank threatened intervention Thursday to stop the slide in the Norwegian currency, the krone, which has fallen 14% since the OPEC agreement collapsed two weeks ago. “Against this background Norges Bank is continuously considering whether there is a need to intervene in the market by purchasing Norwegian kroner,” it said in a statement.

Graf says he believes there is a better chance of some form of coordinated intervention to weaken the dollar happening than there was two months ago, but he still has doubts. “The issue is who has dollars to sell? Of course the U.S. does. The other owners of reserve currencies—China, Japan, the euro zone to some degree—are they going to really sell that many dollars and drive their own currencies up that much more, especially China, because that entails selling Treasurys which the U.S. probably doesn’t want them to do?”

Interest rates not a factor

Factors that usually influence a currency’s weakness or strength, such as the level of interest rates, inflation, the current account balance, are less important right now than the effectiveness of a country’s strategy for containing coronavirus and avoiding lasting damage to the economy.

Typically, a central bank’s move to slash interest rates and create money to buy government bonds would weaken a country’s currency. But in the current crisis, foreign exchange markets are cheering decisive action by governments and central banks to contain coronavirus and get their economies back on track.

The U.S. government is now pulling out all the stops to lessen the impact of the coronavirus outbreak on the economy. The Trump administration is pressing for a $1 trillion stimulus package (which may go much higher than that) while the Fed has slashed rates to near zero and launched a $700 billion quantitative easing program.

While markets have welcomed decisive government action on coronavirus, there are still lingering fears over the debt governments around the world will build up to pay for these emergency measures.

Why is the pound tanking?

The British pound has fallen sharply in recent weeks—not only against the dollar but also against the euro. Sterling was trading at $1.31 on March 9 but dropped below $1.15 last week before recovering slightly. Make no mistake—that's a staggering fall.

British authorities have announced 330 billion pounds ($390 billion) to help business cope with coronavirus, and Prime Minister Boris Johnson’s government, after initially facing criticism that it had been slow to act to contain the outbreak, has ordered the closure of schools as well as pubs, restaurants and gyms. The British economy was forecast to grow by an anemic 1.1% this year even before coronavirus hit. Now, Britain and the global economy face the prospect of recession.

Talks on Britain’s future trading relationship with the European Union, which it left at the end of January, have been disrupted by the coronavirus outbreak, fueling doubts about whether a deal can be negotiated by the December 31 deadline.

A round of talks in London was canceled last week due to the outbreak and the EU's chief negotiator Michel Barnier is in isolation after testing positive for the virus. Johnson has ruled out seeking an extension to the deadline, raising fears that the British economy could face another shock if no agreement is reached.

“The U.K. is a twin-deficit economy. We’re talking about huge budget deficits to come. It already has a big current account deficit and that requires funding and therefore you need to build in a concession to attract capital to fund deficits,” Graf said, explaining why the pound was sinking.

“Sterling was also a massive consensus long for most of the (foreign exchange) community—except for us, we were quite short,” he said.

Recovery in the works?

Slumping currencies should eventually recoup some of their losses, says Graf. “There are one or two expensive currencies out there, that is the dollar and possibly the (Chinese) renminbi, depending on how you look at it. Everything else is cheap and especially after this week exceedingly cheap for currencies like Norway, sterling, the Aussie dollar, so yes they will recover. It’s hard to know when that recovery starts and how long it will take.”

In the meantime, it's king dollar all the way.