World Currency Observer
Exchange rates around the world

Exchange Rates: one year high and low

June 3, 2015 (See June 17 update below. Next update: July 1, 2015. Visit Search to look at past issues of World Currency Observer (brochure edition).)

The Euro is down over 1.5% on the month against the US$, and the yen is down 3.2% on the month, and both currencies have fallen more than 20% against the US$ since this time last year. The vast majority of currencies around the world are showing similar movements against the US$, with two major exceptions being China and Taiwan, whose currencies are largely steady on the month and since this time last year. Oil prices in US$ terms are up 4% on the month, and down over 40% since this time last year. The price of gold is down around 5% since this time last year.

Here are some notes from WCO on the nearly $10 billion (to date) foreign exchange market rigging settlements with several of the world’s largest banks, the 2nd tranche of which was announced the week of May 18 2015, and the 1st tranche having been announced the week of November 11, 2014. The settlements relate to transactions which took place from December 2007 until at least January 2013. Besides payments to regulators to settle civil suits, both tranches of the settlement included requirements for changes in foreign exchange market practices by the financial institutions involved. They apply to transactions in the most widely traded segment of the market, the US$/Euro pair, but the wording of the settlements suggest the remedies put in place will impact other pairs. The investigations focused on the 1:15 and 4:00 daily settings of the US$/Euro benchmark, and also on transactions which had already been sold to clients, and which had to then be funded in the interbank market. The 2nd tranche also included penalties for criminal activity in the United States (the reason for the US Department of Justice involvement), as the collusion among traders violated parts of anti-trust laws intended to promote competitive markets. There will likely be further announcements of settlements, one reason being that authorities will seek to ensure that the fines/penalties paid by the financial institutions are commensurate with the profits/damages involved (the benchmark for such penalties: twice the illicit amounts made/value of damages to victims). The defendants in these particular settlements (the list will likely grow) are three American banks, two UK banks (one of which is Barclays, whose US “port of entry” is New York) and one Swiss bank, and are based on transactions which took place (nominally) in London and Chicago-the list of regulatory bodies involved in the settlement reflect this mix. The fines/penalties involved are large enough so that the financial institutions will “feel” them, some more than others, such as those also affected by the LIBOR-fixing settlements. UBS was the first to report and received some immunity from prosecution. US Federal Reserve involvement relates in part to the fact that the May tranche of the settlement focused on the parent banks (the bank holding companies, under Fed supervision) in addition to the banks themselves.

The IMF, in connection with its annual consultations with China, expressed some views with regard to whether the yuan is overvalued (important to US perceptions in the context of the Trans-Pacific Partnership negotiations), and possible inclusion of the yuan in the SDR basket (a certainty), as follows:

Yuan valuation: “On the external side, China has made good progress in recent years in reducing the very large current account surplus and accumulation of foreign exchange reserves. Nevertheless, staff projections for 2015 suggest that China’s external position is still moderately stronger than consistent with medium-term fundamentals and desirable policies. There are several factors influencing a country’s external position, with the exchange rate being one of them. While undervaluation of the Renminbi was a major factor causing the large imbalances in the past, our assessment now is that the substantial real effective appreciation over the past year has brought the exchange rate to a level that is no longer undervalued. However, the still-too-strong external position highlights the need for other policy reforms—which are indeed part of the authorities’ agenda—to reduce excess savings and achieve sustained external balance. This will also require that, going forward, the exchange rate adjusts with changes in fundamentals and, for example, appreciates in line with faster productivity growth in China (relative to its trading partners). On the exchange rate system, we urge the authorities to make rapid progress toward greater exchange rate flexibility, a key requirement for a large economy like China’s that strives for market-based pricing and is integrating rapidly in global financial markets. Greater flexibility, with intervention limited to avoiding disorderly market conditions or excessive volatility, will also be key to prevent the exchange rate from moving away from equilibrium in the future. We believe that China should aim to achieve an effectively floating exchange rate within 2–3 years.

The yuan in the SDR basket (currently the US$, Euro, UK pound and Japan yen): “ As part of the ongoing review of the Special Drawing Rights (SDR) basket at the IMF, the Chinese authorities have stated publicly their interest in including the Renminbi (RMB) in the SDR basket. We welcome and share this objective and will work closely with the Chinese authorities in this regard. As the Managing Director of the IMF has said, RMB inclusion is not a matter of ‘if’ but ‘when’.

China and South Korea have signed (but not yet ratified) a comprehensive free trade agreement, to be implemented over a 20 year period –WCO will say more about this very important agreement in the WCO June 17 update. More than 2000 people have died in the current India heat wave.

June 17, 2015 update

Nepal is said to have come up with a US$ estimate of earthquake damages (the estimate is said to be equivalent to around 1/3 of one year’s GDP)...the German Chancellor is said to have remarked on how a Euro which is too strong can affect Spain, Portugal and Ireland…the President of the United States is said to have mentioned his concern about the strength of the US dollar (there was a denial that he said this)...Zimbabweans are to exchange what remains of their now-unused former currency (Zimbabwe dollar) for US dollars, which was hyperinflated before abandonment in 2009...in the next few days, there will be another to-the-brink moment (maybe the last one) for talks between Greece and the European Union and International Monetary Fund with regard to the release of the last tranche of previously-agreed-to loan funds.

Iceland has presented detailed background on a strategy for the future elimination of capital controls on certain conversions of the krona to foreign currencies. The strategy includes two pieces of legislation, one of which covers procedural issues, while the other involves a special 39% stability tax on the assets of failed banks, which can be applied prior to currency conversion.

Observations from the Chinese government about the China-South Korea free trade agreement include: it will cover over 90% of all exported goods for both countries; China is South Korea’s largest trading partner (exports plus imports), and South Korea is 4th China’s largest partner; and products from the Kaesong Industrial Zone in North Korea are covered by the agreement.

(World Currency Observer will next be updated on July 1, 2015. At the 2015 FIFA Women's World Cup of football (soccer), WCO staff are supporting Canada and Côte d’Ivoire, but also note that it would be a major upset for “Les Éléphantes” to eliminate one of Germany, Norway or Thailand in Group B. Visit Search to look at past issues of World Currency Observer (brochure edition).)