World Currency Observer
Exchange rates around the world

Exchange Rates: one year high and low

August 5, 2014 (See August 19 update below. Visit Search to look at past issues of World Currency Observer (brochure edition).)

The euro and yen were weaker on the month against the US$, but the Euro is still stronger than a year ago. A backdrop to currency movements was news, at the end of July, that US 2014 2nd quarter growth was strong enough to move the US back into positive growth for the first six months of 2014. Another theme in many countries in the last couple of months is more focus on their own situations, particularly on the degree to which their inflation rate gives them room or motivation for interest rate movements (some up, others down), with a side-long glance at their exchange rates. A good example of mixed movements during July has been the South American currencies.

The list of countries undertaking investigations into the manipulation of foreign exchange benchmark rates is getting long, and includes the United Kingdom, the U.S., Switzerland, and on and on. The focus of these investigations is on how foreign exchange benchmarks, intended to reflect an average of market rates, were being massaged, and thus affecting compensation payments based on exchange rates, and on the exchange rates used to settle transactions. So, while the percentage deviation of the benchmarks from the true rates might be very small (say, 0.2%), they could represent huge gains for those doing the manipulations, and corresponding large losses for participants on the other side of the transactions (although, when spread over thousands of the ultimate victims, i.e., the customers of the participants, the loss per victim can be very small and often unnoticeable).

Argentina defaulted on some of its debt payments on July 30, 2014. Although Argentina, as required, had deposited the money for the interest payments in the appropriate paying agent bank account, distribution of this money to its creditors by the bank was forbidden, according to the terms of United States court rulings with regard to the “holdout funds” which did not go along with the terms of the Argentinian debt restructuring (the so-called “vulture funds”). To be remarked is that some countries have legal provisions which force all holders of the debt of sovereign countries to accept the terms of debt restructurings. (Note: after a 25% fall in January, the Argentine official peso/US$ rate has since then hovered at a little above the 8.1 pesos/US$ range. The unofficial “blue dollar” rate is just under 13/US$).

The Indonesia presidential elections were finalised on July 22, 2014 (winner: Joko Widodo), and have led to speculation about what the results will mean for the 21st century version of the “mercantilist” policies which have been implemented by the Indonesian government. (Note: the population of Indonesia is around 250 million, 4th largest in the world). The centerpiece of the Indonesian policies has been bans and restrictions on some types of raw mineral exports, with the intent being to export higher valued, more-processed ores. A lesser thrust in this direction, suggested during the election, is a proposed movement toward more self-sufficiency in food, by placing restrictions on the expansion of some types of one-crop plantations at the expense of multi-crop farming (although this thrust has also been motivated by long-standing environmental concerns regarding over-specialisation in single crops on large areas of land, and also by continuing concerns related to illegal logging). The Indonesian rupiah is currently around 11600, down 13% on a year ago, but up nearly 5% on the month.

August 19, 2014 update

Updating WCO’s previous observations on the choice of currency for an independent Scotland, currency concerns were a major part of the August 5/14 televised debate between major figures in the yes and no sides (Salmond vs. Darling), and it now appears they will be a major influence on how the vote goes in deciding if Scotland should be independent. Some of the currency-related ideas and contentions from the debate were as follows:…currency union will work only if you have a political and economic union, and a banking union (the general theme of lessons from the Euro, in which the United Kingdom does not participate)…the creation of a new Sterling Zone (WCO note: the historical term was Sterling Area)…the pound sterling belongs to Scotland as much as to England…Scotland using the pound in the same way that Panama and Ecuador use the US$...Scotland not to be stopped from using the pound, because the pound is an internationally traded currency…England is bluffing in its rejection of a currency union…what is Scotland’s Plan B if a currency union does not take place…Scotland’s relationship with England: to be the same as that of Portugal to Germany?…no Bank of England behind Scottish banks (lender of last resort) in case of independence…Bank of England setting interest rates without Scottish direct participation…if economic policy is set in England, this would not be independence for Scotland…like divorce and keeping the joint bank account…independence to be the end of austerity, but would a currency union prevent Scotland from borrowing…future prospects for North Sea oil (to decline?)

The sad outbreak of ebola (a fatal disease with no proven vaccines nor cures) in Sierra Leone, Guinea and Liberia, shows how health concerns can affect international trade and currency markets, as WCO notes that several neighbouring West African countries have imposed partial or total bans on the movement of goods, services and people to and from these countries (considered to be an over-reaction by the World Health Organisation).

Russia has, in response to economic sanctions, completely banned the importation of beef, pork, fruits and vegetables, poultry, fish, cheese, milk and dairy products from the European Union, the United States, Australia, Canada and the Kingdom of Norway.

(Next update: September 3, 2014. Visit Search to look at past issues of World Currency Observer (brochure edition).)