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World Currency Observer

Exchange Rates: one year high and low

August 3, 2016. (see August 17 and August 30 updates below) Next update: September 7, 2016. Visit Search to look at past issues of World Currency Observer (brochure edition).

There was little net change in the Euro and the Japan yen against the US$ in July, but it should be noted that there was weakness in the second and third weeks of July, which was reversed in the fourth week - this also happened to many other currencies around the world. Despite the small net movement in July, the yen is 17% stronger against the US$ than a year ago - the Euro is up around 1% since a year ago. The Iceland krona rose more than 3% in July against the US$. The Turkey lira is down 4% on the month and 9% on the year against the US$. The United Kingdom pound was unchanged over the month of July, but is down around 18% since a year ago against the US$, with similar magnitudes of movement against the Euro. The Kyrgyzstan som was up more than 5% in July against the US$. Also up nearly 5% against the US$ in July was the South Africa rand, and, as a result, is down over 7% since a year ago. The Nigeria naira was down 11% in July, and has now fallen nearly 60% since a year ago against the US$. The South Korea won was up 3% in July against the US$, and is up over 4% since a year ago (South Korea had announced an economic stimulus package at the end of June). The China yuan showed little change over July, but is down against the US$ by nearly 7% since this time last year (although weakness of the yuan has been more pronounced against many other currencies, causing concerns in these countries, which were given voice at the end-of-July G-20 meetings of finance officials, in Chengdu). Among commodities, the US$ price of gold is up 21% since a year ago, and silver is up by 38%. World cotton prices are up sharply on the month, by nearly 14%. World sugar prices declined sharply in July, but are still up nearly 70% since a year ago (in the media, the focus is still on the May 2016 vs May 2015 difference, which was “only” a 22% increase in world sugar prices). Many other soft commodities saw price weaknesses in July, among them being cocoa, maize, soybeans and wheat. World oil prices declined sharply in July, and are now touching US$40/bbl - developments in oil prices remain the single most important determinant of world currency movements. Overall, longer term interest rates (10 years and up) have been easing in many parts of the world against a backdrop of slowing economic growth.

A scheduled visit to Egypt by the International Monetary Fund in connection with future financing brought some focus by world media on the Egypt pound, whose downward movement in the Middle East over the past year has been exceeded only by the war countries of Syria and Yemen. The Egypt official rate showed little movement on the month, but is down over 13% since last year, with reports that unofficial exchange rates (pounds/US$) are around 50% higher than the official rate of 8.86/US$.

August 17, 2016 update

At the midpoint of the month, a standout among the major currencies of the world has been the weakness in August of the United Kingdom pound sterling against the US dollar, falling steadily since the beginning of August, from 1.32/US$ to around 1.29 (2 ¼% decline) - over the same period, other major currencies have showed strength, including the Euro (which went down, but then rose back up) and the Japan yen. Contributing to the August fall in the pound have been monetary policy changes by the Bank of England: a ¼% reduction, to 0.25%, in the bank rate; purchases of government and corporate bonds; and increased reserves under a scheme to encourage banks to pass on wholesale interest rate decreases to their clients. In addition, while concrete changes (government spending, regulations, etc.) due to the BREXIT vote to leave the European Union will not occur for some years, views are being taken now on what they might be, also affecting the pound.

August 30, 2016 update

WCO has been monitoring developments in Argentina over the past few months: the movement of the Argentina peso from fixed to floating, accompanied by very high interest rates, $9 billion payments in US dollars to the hold-out bondholders in the United States and elsewhere (financed by over $16 billion in new borrowing, which was available after the shut-out of Argentina from international capital markets ended in April), and the move to instantly cut utility (electricity, gas) subsidies and raise rates, with a potential savings in 2016 of perhaps $4 billion. WCO is reminded that movements from rigid fixed exchange rate regimes (the kind that are characterised by large parallel free markets, with free exchange rates that are substantially above the official rate) to flexible regimes are, too often, accompanied by other sudden changes that increase the pain of the transition, particularly for those on the bottom of the economic ladder. In this vein, it is perplexing that the new Argentina government saw the need to make severe changes in utility subsidies and rates so quickly, instead of phasing-in the changes, particularly when the general population was already coping with large increases in exchange rates (affecting import prices) and interest rates. To be fair, world-wide media reports say senior Argentina officials acknowledge that the way that it made the utility tariff movements has been a mistake (they may have been told that the utility tariff move was necessary to ensure the success of its foreign bond issue, and for future foreign investment in Argentina). One hope: that considerations with regard to social impact play a bigger part in planning future transitions from fixed to flexible exchange rate regimes (e.g., suggestions for moderating the Euro regime in Europe.)

(World Currency Observer will next be updated on September 7, 2016. Visit Search to look at past issues of World Currency Observer (brochure edition).)