Headline for .     The US dollar has been strengthening since it reached a recent “bottom” against many currencies in early September.     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

November 1, 2017 (see November 15 and November 29 updates below). Next update: December 6, 2017. Visit Search to look at past issues of World Currency Observer (brochure edition).

The US dollar was generally stronger throughout the world in October (see headline above). The Mexico peso fell by nearly 6% against the US$ in October, but, even so, is down just 2.5% since this time last year. The Canada dollar fell by nearly 3% in October, but it still up nearly 4% since this time last year. The Iceland króna is up by 7.7% against the US$ since this time last year. The Jamaica dollar was up by nearly 2.5% against the US dollar in October. The Brazil peso fell by nearly 3.5% against the US$ in October. The Euro declined by 2% against the US dollar in June, but is up 5.6% since this time last year. The United Kingdom pound moved down against the US$ and the Euro in October, but is still more than 7% stronger against the US$ than this time last year. The Turkey lira fell by more than 6% against the US$ in October, and was down against the Euro by a little more than 4%. The Kazakhstan tenge rose by 2.1% against the US dollar in October. The Qatar riyal and the Iran rial both fell against the US$ in October. The Israel shekel is 8.5% stronger against the US dollar than at this time last year. The South Africa rand fell by nearly 5% against the US$ in October, and is now down by 2.5% since this time last year. The Ethiopia birr was devalued by 15% on October 11 by the central bank, adding up to a 23% decline against the US$ since this time last year. The New Zealand dollar fell by more than 5% against the US$ in October. The Japan yen is 8% weaker against the US$ than at this time last year (the re-election of a strengthened Abe government in October sugest a continuation of the economic stimulus policies of the last few years in Japan.) There was little change in October in the China yuan, where the wrap-up of the 19th Communist party congress, and the enhanced position of President Xi, suggests a continuation of an almost single-minded focus on the attainment of strong economic growth, without worrying too much about things such as debt-levels and the prestige status of the yuan, but with concern about attacking corruption. The South Korea won rose by 1.6% in October against the US dollar (news from South Korea includes, besides U.S. moves to renegotiate the very important US-Korea free trade agreement, numerous statements that the government will reform the chaebol (family conglomerates) industrial sector, to make the economy more competitive). After a 2.6% fall against the US$ in October, the Bangladesh taka is now nearly 6% weaker against the US$ than this time last year. Oil prices are up around 6% on the month. In North America, US$ prices for softwood lumber are nearly 50% above their level of a year ago, due to U.S. customs duties which are at the heart of the NAFTA-related dispute Canada is having with the United States over softwood lumber exports. World sugar prices (in US$) rose in October, but are still nearly 35% weaker than a year ago.

fx dealer box all WCO monitors foreign exchange quotations at foreign exchange dealers in different countries –these dealers are generally the source of foreign currency cash for tourists and other travellers. While dealers quote buy and sell rates to their customers, their focus is basically on one-way transactions, on the assumption that the purchased foreign exchange will be mostly spent in the foreign country. The buy-sell spreads at foreign exchange dealers are based on, but are not the same as, the bid-ask spreads of foreign exchange market makers, and buy-sell spreads can vary from dealer to dealer and, especially, from country to country. The competitive challenge for a foreign exchange dealer selling a currency is not only other dealers in its own country (one set of dealers whose influence varies across countries: full-service banks). Their challenge also includes foreign exchange dealers in other countries willing to buy the home country currency at competitive exchange rates.

WCO has been mulling over the flow-of-funds implications for the US dollar of one part of President Trump's tax proposals, namely, the treatment of foreign profits. At present, US companies (generally) pay US corporate taxes on overseas profits only when they are repatriated to the United States as dividends to the parent firms, so this part of the US tax system gives no incentive to repatriate foreign profits. If foreign profits have to be left overseas and are not taxable in the U.S, US companies have an incentive to arrange revenues and costs so that foreign taxes, the only ones to be paid, are assessed in countries with the lowest corporate tax rates available - favoured jurisdictions are said to include: Ireland, Luxembourg, Switzerland, Bermuda, several UK Caribbean territories, Singapore and the Netherlands. The Trump proposal is to tax all US corporate profits at the same rate, no matter where they are – corporate taxes paid overseas will become, as is the case for other such foreign taxes, a deduction from the U.S. taxes - thereby eliminating the existing incentive to not repatriate foreign profits. The foreign earnings abroad already accumulated by US companies will be instantly deemed as repatriated, and subject to US corporate tax, with some transitional measures. ("Payment of the tax liability will be spread out over several years...Accumulated foreign earnings held in illiquid assets will be subject to a lower tax rate than foreign earnings held in cash or cash equivalents."). The sting of taxes which will be instantly payable is to be lessened by the intention that general corporate tax rates will be lowered under other parts of the tax proposals. WCO is thinking through the question of which way the money will flow because of this particular corporate tax change (ignoring for the moment the impact of other parts of the overall plan, not to mention the many other things that are happenning in the world). Will US companies bring their money home? Or, will US companies move their US operations abroad? And, if foreign taxes become merely a deduction from an overall tax bill which is the same everywhere, there will be less of a tax incentive for corporations to seek out tax havens, implying a restructuring of the locations of overseas operations for US-based multi-nationals.

And, to continue with the flow of funds theme and its impact on currencies, a question still to be resolved is: how much should the UK have to pay the EU in connection with the BREXIT withdrawal from the European Union? Prime Minister May has suggested that the UK should continue to pay into the EU budget for the two years after BREXIT in 2018 until the end of the current EU budget framework, which is 2020 -the number which has been floating around for a couple of months in connection with this idea has been 20 billion euros (the total EU budget is in the 150 billion Euro range). The UK would also, presumably, be responsible for its share (15%?) of the (carefully measured) negative equity of the EU government (=EU government assets minus liabilities), perhaps around 10 billion Euros. WCO notes that there is a growing air of pessimism about hopes for a soft BREXIT, but others seem to feel that, if the highly visible funds-transfer part of the BREXIT package can be wrapped up by the end of December (with movement on the degree of participation by the UK in the EU single market), other parts of the agreement will start to fall into place.

November 15, 2017 update

The Trans-Pacific Partnership agreement is moving forward again (with a meeting in Vietnam on the margins of the APEC meeting), without the participation of the United States, and with some fresh requests from Canada for modification of the agreement…The value of the bitcoin hit some new highs (WCO remarks that, while WCO follows developments and price movements of bitcoins and other crypto-currencies, we do not consider the bitcoin to be a currency)…The President Trump ideas for the treatment of offshore taxes by American companies (part of his comprehensive tax plan) have been augmented by two new sets of proposals, from the majority Republicans in each of the U.S. Senate and the U.S. House of Representatives…Fresh insights into who uses world tax havens have emerged from a major new leak (release) of confidential tax data, known as the Paradise Papers…Saudi Arabia has created new tension in Lebanon, with demands that Lebanon “choose” between itself and Iran–the current episode, part of the long-standing rivalry between Saudi Arabia and Iran, started when the Prime Minister of Lebanon travelled to Saudi Arabia, from where he issued a resignation statement…There are reports, attributed to Standard and Poors, that Venezuela has entered into a technical default situation on some part of its foreign currency government debt.

November 29, 2017 update

An unusual situation for a fixed exchange rate regime has developed in the Middle East country of Qatar (population of just under 3 million), where an offshore parallel market, with a foreign exchange riyal per US$ rate noticeably and persistently higher than the official rate (as much as 5%), is reported to have emerged (since around the middle of July), something not to be expected in a petroleum-rich country with massive foreign exchange reserves (which are augmented by a massive sovereign wealth fund), and in one where the central bank has emphasised (most recently, in a November 23 press release) that it can, and will, "provide all requirements of foreign currencies at the official exchange rates for investors, including local and foreign individuals and institutions". What required the public intervention of the Qatar Central Bank on November 23 was a report that a major financial firm was thinking about starting to use the parallel riyal exchange rate (offshore, unofficial) to estimate the value of the Qatar stock market, instead of the official rate of 3.64/1$US. Parallel markets generally develop when the government does not have enough foreign currency to satisfy the demands of importers and domestic investors in foreign assets, so they go (if they can get away with it) to private (sometimes illegal) foreign exchange markets, paying a higher exchange rate than the official rate. (In order to escape restrictions which may exist in the home country, such parallel markets are generally anchored by offshore transactions.) On the other hand, the underlying reason why the parallel market has developed for the Qatar riyal is generally attributed to the six-month-old (June 5) economic blockade imposed on Qatar by Saudi Arabia, the UAE, Bahrain and Egypt, which has had the effect of restricting access to foreign currency by holders of Qatar riyals, so they turned to the unofficial market - the one-word description generally being applied is that there is a liquidity problem for holders of the riyal, requiring them to pay more for foreign currencies. The politics of the overall sanctions are linked to relations with Iran. And developments in Qatar are being watched to see if there are implications for other fixed exchange rate regimes in the Middle East.

(World Currency Observer will next be updated on December 6, 2017. Visit Search to look at past issues of World Currency Observer (brochure edition).)