Headline for .     The US dollar has been generally stronger since reaching a low at the end of January 2018, with an even stronger upward movement since the beginning of April 2018.     WORLD CURRENCY OBSERVER thanks readers for comments. In any language, on any topic, send them to renaissance@briargreen.com.    
World Currency Observer
World Currency Observer

Exchange Rates: one year high and low

May 1, 2019 (see May 15 and May 29 updates below). Next update: June 4, 2019. Visit Search to look at past issues of World Currency Observer (brochure edition).

Many currencies around the world fell against the US$ in the last week of April, generally attributed to the announced intention by the United States to punish 3rd countries who trade with Iran. The month of April finished with indications of continued strong growth in US GDP in 2019, likely to contribute to further U.S. dollar strength. The Iceland króna moved up slightly in April after falling in March, leaving it down 20% against the US$ since this time last year. The Mexico peso rose over 2% in April against the US$, despite weakening during the last week of the month. The Jamaica dollar fell by 7% against the US$ in April. The Uruguay peso fell by nearly 3% against the US$ in April, and the 22% downward movement of the Uruguay peso against the US$ since this time last year is among the largest year-over-year downward movers against the dollar, with the exceptions of the Argentine peso, and the hyperinflating Venezuela bolivar. The Euro fell slightly against the US$ in April, leaving it down by 8% since this time last year. The United Kingdom pound rose slightly against the Euro over the whole of April (and is up by 2% against the Euro since this time last year); the Switzerland franc fell by around 2% against the Euro in April, but is still up by 4.5% since this time last year. The Sweden krona fell by 2% against the Euro in April. The Turkey lira fell by 7% against the US$ in April after a decline in March, which has left it down at the end of April by nearly 50% against the US$ since this time last year. The Hungary forint is down by 3.5% against the Euro since this time last year. The Armenia dram moved up by over 1% against the US$ in April, as did the Russia rouble. The largest year-over-year movement of former-USSR currencies is the 17% downward movement of the Kazakhstan tenge against the US$, followed by the 11% drop of the Ukraine hryvnia. The Egypt pound continued to rise against the US$ in April after a February increase, and is now nearly 3% stronger against the US$ than this time last year. After a 2% movement in April, the Iran rial (the target of stiffening US sanctions) is around 110% weaker against the US$ than time last year. The Zambia kwacha fell against the US$ by over 4% in April, and is down 30% since this time last year - the kwacha is now at more than 12/1$US - it was at 10 in the middle of last summer. The South Africa rand moved up slightly against the US$ in April, leaving it 16% lower against the US$ since this time last year. The Sierra Leone currency is the leone, and it is down by nearly 10% in April 2019, leaving it down by 17% against the US$ since this time last year. The Liberia dollar, after weakening in April, is down nearly 30% against the US$ since this time last year. The South Korea won fell by 2.5% against the US$ in April, and has fallen by 9% against the US$ since this time last year - the China yuan is down around 6.5% against the US$ since this time last year. The Japan yen is down 2% against the US$ since this time last year, after falling slightly in April. The Philippines peso, after moving up by nearly 1.5% against the US in April, has shown no net change against the US$ since this time last year. The India rupee moved down by just under 1% against the US$ in April, and is down 4.5% against the US$ since this time last year (the Pakistan rupee is down over 20% since this time last year against the US$). The Thailand baht briefly fell above 32 baht per 1$US in the latter part of April, before strengthening to finish slightly weaker in April against the US$, and down by just over 1% against the US$ since this time last year. World oil prices moved up in April, leaving them just below what they were a year ago. Looking across the entire range of commodities, their prices are in general substantially below their year-ago level, with exceptions to this including world rubber and sugar prices.

WCO staff are reading the April 2019 paper issued by the European Central Bank, on the economic implications of the recent rise in protectionist trade measures (Trump, etc.), which includes data from many of the major sources of publicly available research on recent trade restrictions, including the Peterson Institute, Global Trade Alert and the World Bank WITS - it also uses the World Input-Output Data Base to produce its own analysis of international cross-border production chains for exports to the United States by a large number of countries. Against a backdrop of slowing growth in the overall world economy (measured by GDP changes on a country-by-country basis), the conclusion of the paper is interesting, in that, in our reading, it is less pessimistic than many of the world headlines on the overall economic impact of worldwide trade war. The ECB paper (English version) notes that: the impact of measures announced so far has been “contained” (China-United States trade by far the largest affected by the trade war, with Canada and the European Union each 2nd, although the impact on Canada has been larger due to its smaller size); and, with regard to the impact on the world economy, that “large negative effects could materialise if trade tensions were to escalate further” (one of these trade tensions is, of course, the forthcoming BREXIT). Among the remarks made is that the long post-World War II period of growth in international trade may have looked like it had stalled at some point, but some of this has been due to the increased importance of services in the world economy, which are less “trade intensive” (one reason: they often occur mainly by direct investment establishment of subsidiaries and other links with firms in the host country, rather than by straight cross-border sales of services). WCO’s reading of the paper is that it suggests that the impact of rising tariffs on world markets due to the trade war appears to have remained, so far, confined to the targeted sectors and countries, although it suggests that other less measurable second-stage impacts may still be working their way through (such as risk assessment by financial markets.) For example, Chart 7 in the paper illustrates one consequence, which is a redirection of China imports of vegetables from United States sources to Brazil. The paper includes economic model-based assessment of trade impacts (Charts 12 and 13). Chart 6 in the ECB paper shows the impact of each of the three packages of announced U.S. tariffs on U.S. imports from China (the $34bn July 2018 tranche, the $16bn August 2018 tranche, and the $200bn September 2018 tranche), in each month before and each month after announcement of the tariffs, which also captures the fact that the full impact of these measures takes time, suggesting the tariffs each had a sizeable impact immediately after implementation, which intensified over time. As part of an analysis of the impact of tariffs increases on U.S. automobile imports, the paper presents data, for a number of countries, on how their auto exports to the U.S. are distributed among the supply chain (final product exports, intermediate product exports, etc.), and it also uses the input-output data to undertake this analysis for all exports to the United States by the same countries. It is noted that production in other parts of Asia is often embedded in China exports to the United States, so spillover effects have occurred, for countries such as Taiwan and South Korea. Also of interest is a model-based analysis of a hypothetical trade war, with the United States placing a 10% tariff on imports from all countries, and all countries retaliating. In such a case, it is suggested that one of the winners would be China, which could increase its exports to 3rd countries to replace retaliated-against United States exports.

May 15, 2019 update

June 1 is the key date for higher tariffs announced by U.S. and China, on U.S.-China trade, with the U.S. having made the first move, to force China to make more concessions in ongoing trade talks. U.S. tariff increases, from 10% to 25%, on the previously-targeted U.S.$200 billion tranche of imports from China, will be first applied on or about June 1, when goods shipped from China on May 10 will probably first start arriving in the U.S. China announced retaliatory tariffs of 10% and 25%, applicable to the previously tariff target of $60 billion tranche of U.S. imports, starting June 1, but with some exceptions – the previously announced 5% tariffs on some goods will stay at 5%, influenced by previous requests by some importers that certain goods (from the U.S., but also from Canada as well) be exempted from tariff increases.

WCO is watching the moves by the Turkey central bank, announced on May 9, to reduce liquidity in the banking system, moves generally viewed as heavily influenced by weakness in the lira. Looking at this issue with regard to the United States dollar, an important link in any country between monetary policy actions and the exchange rate is the amount of liquid funds in the banking system, with the most important indicator of liquidity being the interest rate on loans of one day or less, typically made between banks (in the United States, this is the well-known Fed Funds rate; in Europe, it is the overnight LIBOR rate; in other countries it may be known as the call rate; and so on). In the United States, for many years, an important reason why liquidity changes had an impact on banks was that banks were, essentially, always “short” of the liquid reserves they were required to keep (as deposits at the central bank) against their deposits on behalf of their customers, to ensure funds were available to provide for withdrawals for deposits. The world changed after the financial crisis in 2008, when many countries followed some version of the famous U.S. “Quantitative Easing” approach to stimulate their economies, which had the effect of injecting so many reserves into their banking system that there were always enough reserves. This would have pushed overnight interest rates to zero everywhere where this easing had happened, except that many central banks paid interest on excess reserve deposits at the central bank (in the U.S., this is the IOER=the rate of interest paid on excess reserves). According to a recent speech by a U.S. Fed official, the core demand for reserves by the entire U.S. banking system (not just the required amount, but, more generally, the amount at which they feel comfortably liquid), at this moment, is estimated as perhaps as high as U.S.$900 billion As the U.S. Fed reduces its holdings of U.S. Treasury securities as part of the continual unwinding of the Quantitative Easing program, banking system reserves will fall, and an interesting question is when they might fall to the just-mentioned core demand (the Fed already knows what it will do after that date is reached). WCO thinks that will be an important date in the evolution of currency markets, and it is something for which we will be watching.

WCO also wants to mention a Bloomberg Business Week article (April 22, 2019) on the gradual disappearance of investment funds which solely focus on currency movements, which it generally attributes to a reduction in currency volatility - in this case, it appears to mean the very short-term ups and downs in currencies on which active traders make (or lose) money. The recent reduction in worldwide volatility is generally agreed to have started after the financial crisis of 2008. WCO remarks that, despite this recent trend, instances of “big” currency volatility always seem to come along. The 2008 financial crisis was itself the source of much currency volatility (with opportunities for profit) while it happened, due to things like: foreign exchange losses for “carry trade” investors who borrowed in low-interest–rate-currencies to make unhedged investments in higher-interest-rate-currencies paper; a shortage of US dollars (cash and loans) available for holders of foreign currencies, due to market jitters in the middle of the crisis; and so on. Other instances of “big” currency volatility include: the United Kingdom exit from the European Exchange Rate mechanism in 1992, with a massive fall in the UK pound (linked in the popular mind to George Soros); the 1997-98 Asian financial crisis, with sharp devaluations of the Thailand, Indonesia, Philippines, Malaysia and South Korea currencies; the fall in the rouble (and in other former USSR currencies) that followed the Russian debt default in August 1998; the Mexico peso devaluation 1994 (the Tequila crisis); and so on.

May 29, 2019 update

Although the US-China trade war continues (with end-of-May weakness in the China yuan against the US$ being reflected in weakness by currencies of other Asian countries with strong supply-chain connections to China, especially the South Korea won and the Taiwan dollar), moves by the United States to eliminate steel and aluminum tariffs for Canada and Mexico, and to cut steel and aluminum tariffs by half for Turkey, brought corresponding cuts in tariffs on a broad range of U.S. goods in each of these countries, many of which were targeted on United States food exports. The United States (Trump) also announced that it would delay for 180 days, until the middle of November 2019, the use of the national security power to restrict auto imports from the European Union, Japan and other countries – the determination of a national security justification for such restrictions had been announced three months ago by the United States, on February 17. The moves by the United States had broader positive implications, with Canada and Mexico now prepared to implement the updated North American Free Trade Agreement, and with Turkey indicating a perhaps greater willingness to accept a United States decision to “promote” Turkey (“based on its level of economic development”) from its 1976 list of developing countries (Generalized System of Preferences) that receive preferential tariffs on their exports into the United States

(World Currency Observer will next be updated on June 4, 2019. Visit Search to look at past issues of World Currency Observer (brochure edition).)