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September 1/21 (see September 15/21 update below). Next update: October 1/21. Visit Search to look at past issues of World Currency Observer (brochure edition).
As of September 1, world currencies have been under the influence of the Covid-19 pandemic for 1½ years, whose effects have included reduced international mobility of goods and services, and of people (tourism and business travel), all of which flow from economic lockdowns, which stem from measures to stop the spread of the virus. After separating out the countries whose currencies are fixed against the US$, a majority of the flexible currencies around the world have gotten stronger against the US$ since before the pandemic, consisting for the most part of those that use the Euro, or are have strong trade and other ties to countries that use the Euro (such as Eastern Europe countries). Non-Euro countries whose currencies have become stronger against the US$ over the pandemic include Australia, Canada, China, New Zealand, Taiwan and Vietnam. In August 2021, net movements of currencies around the world against the US$ were generally small – for example, the Euro finished the month at around .846/1$US, a little weaker on the month, but has gone up by nearly 5% against the US$ since the start of the pandemic. Among countries whose currencies have weakened against the US$ since the start of the pandemic, a notable group are South America countries and, among these is the Brazil real, down nearly 30% since then, but after rising by a very large 7.5% against the US$ in August. The Mexico peso, which is sometimes placed side-by-side with the Brazil real among Latin America countries, has fallen by 7% against the US$ since the start of the pandemic, after a 2% decline in August 2021. WCO is looking for currency impacts of what, in light of similar situations, can only be characterized as the relatively smooth takeover of the entire country of Afghanistan by the Taliban, with the acquiescence of China and Russia (see below). And, since before the pandemic, world oil prices in U$ terms have risen nearly 10% (after a 5% fall in August 2021), and gold prices have risen by nearly 20% since before the pandemic (down slightly in August). US$ prices for varieties of rice which are sold in international markets have fallen by nearly 10% since before the pandemic.
The Afghani currency, the afghani, has fallen in value to around 86/$1US from 80, not as big a drop as one might have expected in a country where a civil war has just ended, and where a large exodus of people has departed for the United States and other hard-currency countries (there are reports that some of the departing senior government officials have substantial hard-currency holdings in foreign financial institutions). Among the influences on the recent US$ value of the afghani has been an interruption in remittances, due to problems by remittance companies (such as Western Union but also the more informal Islamic networks) with their agents in Afghanistan, as well as bank branch closures in the last two weeks. The bank branch closures have also made it difficult or, in many cases, impossible, for Afghani citizens to access their Afghani currency bank accounts (which works against the predictions of hyperinflation in Afghanistan, although prices for food and other necessities have risen, reflecting in-country supply chain interruptions due to the changes in the governing regime, and the just-mentioned interruption of inflows of foreign currencies). The United States (and other countries) have, so far, refused to recognize that the status of the Taliban has changed from an insurgency to the de facto government of Afghanistan. In their eyes, the Taliban still retains its status as, solely, a terrorist organization (pursuant to United Nations resolutions), and is therefore not permitted access to the approximately US$10 billion in Afghanistan central bank foreign currency reserve assets held as deposits at the New York Federal Reserve Bank (other countries have also made this interpretation on Afghanistan foreign assets, such as the United Kingdom.) Following this lead, many other foreign financial portals have also been closed to the Taliban regime in Afghanistan, such as the International Monetary Fund and the World Bank – “ a lack of clarity within the international community regarding recognition of a government in Afghanistan”. (A remark on the extent of dollarization in Afghanistan: it is one thing for banks and financial institutions within a country to denominate in-country bank loans and deposits in foreign currencies, and yet another for the country to have access to foreign currency notes and deposits in foreign banks which can be used to finance imports and investments – it is the latter which is at issue here. Also, a note that the above-mentioned US$10 billion in assets should be measured against US$20 billion in Afghanistan gross domestic product.)
The International Monetary Fund said that, on August 13, the previously-announced allocation of US$650 billion of SDR-denominated assets among its member countries has come into effect (the SDR is a reserve currency which trades among central banks, and its current value is around US$1.4 per 1 SDR, based on the market values of a basket of major currencies). While the IMF country-by-country allocations are made according to the size of each economy, with the result that richer countries receive more, the IMF is encouraging such countries to channel their new assets to lower-income countries. Mechanisms suggested for this including funding for multilateral investment banks. In this regard, it is interesting to note that there is renewed talk (like there was last summer) that suggests, in the post-pandemic world, financial markets (which include exchange rates) are going to be very focused on country-by-country debt levels, which may give some indication of how the new IMF money will be disbursed, not to mention the path of future financial assistance. In line with this thinking, WCO has seen some commentary on Brazil and Mexico, both of which received praise for managing to keep their debt levels down in spite of their battles against Covid-19. Two IMF member countries which will not, for the moment, be receiving new SDR assets from the IMF: Afghanistan (which has also been informed that other IMF funding set to arrive had been postponed) and Venezuela (also an issue with regard to government recognition).
WCO remarks that a glance at central bank policy interest rates for the world’s more developed nations indicates that, in August and September, there were a significant number of small but definite upward movements, typically 0.25%, but in some cases more. WCO suggests that these increases in policy interest rates in some countries will provide additional background to the discussion in the United States on whether it is time for the U.S. central bank to raise its own interest rates, with the current discussion focused on whether recent increases in United States inflation rates will abate on their own, analyses which are applicable to other countries. The U.S. central bank head (Powell, Federal Reserve) noted in late August (now almost one month ago) that U.S. inflation is not broad-based enough; that there has been moderation in increases in prices in those goods and services where price rises were due to Covid-19-related supply bottlenecks, in wage increases, and in “expectations”; and (very interesting) “sustained disinflationary forces” over the last 25 years. We will see, and watch for the impact on US$-based exchange rates.
A currency episode during the pandemic took place between February 24 (Monday) and March 9 2020 (Monday). On February 21 (Friday, a weekend before Feb 24), the government of Italy, in order to halt the spread of the Covid-19 virus, put the northern part of the country on major economic lockdown, which was major international news, and a signal that a major health crisis was looming, big enough to affect the world economy. This was strongly confirmed to the world on March 9, when Italy extended the lockdown to the rest of the country. On March 11, 2020, the World Health Organization formally declared to the world that Covid-19 was a major worldwide pandemic, signaling the requirement for responses in every country, such as economic lockdowns. Among the measures which followed in the next few days, which normally would be predicted to affect exchange rates, were cuts in interest rates throughout the world, including a 1.0% cut in the United States federal funds rate, on March 15, larger than the 0.5% cut that took place on March 3 (this early cut reflected the movement towards world-wide liquidity which was already taking place - the key European Central Bank rate had been at zero since 2016, but room was found for policy interest rate reductions in the following weeks.) So the period of February 24 and March 9 was characterized by a fast spreading, but unofficial, worldwide recognition that a crisis was at hand, but before the period when the official economy-impacting responses really gained momentum (such as border closures and the above-mentioned monetary policy measures, which also included support for fiscal measures). Among the developments in exchange rate markets over that period, normal in such a period, was a movement towards cash holdings away from financial instruments such as stocks and bonds and, as part of this movement, a flight to quality in currency holdings. As part of this flight, some of so-called safe haven currencies showed notable upward movements against the US$, while other currencies moved down (see the charts for some examples). Also, currencies for most developed countries (those considered hard) showed varying but definite upward movements against the US$, as foreign currency asset holdings were repatriated, while currencies outside this group moved down against the US$ (see chart for some examples). It is interesting to note as well that the US$ price of gold held steady over this two week period, a reflection of its safe-haven status. From March 11 onward, there was a more general downward movement of currencies against the US$, which included the safe-haven currencies which had moved up in the preceding weeks (but note that this downward movement against the US$ changed to an upward movement for many currencies by the autumn of 2020).
(World Currency Observer will next be updated on October 1/21. Visit Search to look at past issues of World Currency Observer (brochure edition). For permission-to-quote enquiries, e-mail World Currency Observer at WCO@briargreen.com.)
