Headline for .     Since the beginning of 2018, despite the Covid-19 pandemic, currencies around the world are generally down against the United States dollar.     
World Currency Observer
World Currency Observer

Exchange Rates: one year high and low

May 3, 2022 (see May 17 update below). Next update: June 1, 2022. Visit Search to look at past issues of World Currency Observer (brochure edition).

In April 2022, a growing list of countries increased interest rates, moves which were generally small (0.25% or 0.5%), and were interpreted as a reaction to increases in inflation, and were usually accompanied by indications that further increases are to be expected throughout the rest of 2022. The big exceptions so far are the Euro-zone and Japan, both of which saw their currencies weaken against the US$ in April. It should be mentioned the Covid 19 pandemic continues, but there is a notable absence of around the world of economic lockdowns, which is reducing the currency impact.

The Canada dollar weakened by 2.5% against the US$ in April 2022 (reacting to news on inflation), and the Mexico peso was down by the same percentage. The Haiti gourde moved down by 3% against the US$ in April, and is now down by 15% from its pre-pandemic value. South America currencies were generally weaker in April against the US$, except for the Paraguay guarani, which moved up by 2%. Many currencies around the world strengthened in the first week of April 2022 against the US$, and then moved down for the rest of the month. Among these was the Euro, which fell by nearly 5.5% against the US$ over the entire month of April; the United Kingdom pound showed a net downward movement of 4.5% in April against the US$. All East Europe currencies, except the Albania lek, weakened in April against the US$ (by 5-7% - an exception was the Turkey lira, down by 1%). Currencies of former USSR countries strengthened against the US$ in April (with the exception of those countries which use the Euro). Syria devalued its currency, the Syria pound, in mid-April, which was moved from 2500/1$US to its current value of around 2815, which is now closer to the parallel market rate of 3900 pounds/1$US (the decision to make this move is generally being linked to the dismissal of the Syria central bank governor). The Israel shekel fell by nearly 5% against the US$ in April. The Sudan pound was up by 10.5% against the US$ in April 2022, and is still down by nearly 50% from its value a year ago. The Guinea franc is up by more than 6% from its value before the pandemic. Africa currencies were generally weaker against the US$ in April 2022, with the exceptions including the Angola kwanza (up 10% against the US$) and the Zambia kwacha (up by nearly 5.5% in April) Asia currencies were generally weaker against the US$ in April, but a standout was the Japan yen, which lost 7% of its value on the month and is now nearly 20% below its pre-pandemic value (generally attributed to Japan indicating that, unlike the rest of the world, it will continue with its low interest rate policy. The Sri Lanka rupee, which fell sharply in March, moved up 17% against the US$ in April, as the IMF indicated an agreement would be reached between Sri Lanka and its external creditors. The Afghanistan afghani moved up by nearly 3% in April against the US$. Looking at the entire range of commodity price movements in April 2022, the question arises whether many of these prices, which have been rising in the last few months, have reached a peak. Among these, world oil prices appear to have stabilized in April 2022, in the US$105 range (a peak not seen for around 10 years), as the supply situation with regard to Russia continues to evolve. Metals prices (both precious and industrial) moved down in April - copper prices fell by over 6% and are also 2.5% lower than they were a year ago (although still more than 50% above their pre-pandemic level) Among agricultural commodities, coffee prices and rubber prices moved down in April.

In the days up to the February 24 2022 Russia invasion of Ukraine, the value of the Russia rouble moved from around 75/1$US to 86 on the day of the invasion, then moved sharply weaker, to 145 on March 7, due largely to sanctions, but also to a growing perception that Russia was going to be bogged down in a war which was not going according to what was widely believed to the outcome that Russia had anticipated, which was a total takeover of Ukraine by end the end of February (it is now more than two months since that date). After March 7, the rouble gradually grew stronger, and is now (May 1) at around 75/1$US. The measures, in March, that Russia put in place to strengthen the rouble, as a whole, worked so well that they were partially eased in April. The key policy interest rate was moved up from 9.5% to 20% in early March, and has been eased slightly in April, to 17%. (With regard to deciding on the magnitude of the rise : it had to be large enough that it reached down to the interest rates received by small bank account holders in Russia, to give them a strong disincentive to withdraw their funds – smaller policy rate increases by Russia would normally have affected only large asset holders, whose ability to move funds in and out of Russia (capital inflows and outflows) has, of course, been curtailed by the financial sanctions imposed on Russia in the first days after the invasion.). The rise in rouble interest rates on bank accounts for the “average” Russia was in addition to a flat prohibition on banks selling euros and dollars to individuals, a measure which was lifted on April 18, but banks were still only permitted to sell to them the foreign currency they received after April 9 (one can imagine the issues this raises with regard to enforcement). Also lifted in April was the 12% tax that had been placed on the purchase by individual Russians, through foreign exchange brokers, of US dollars and Euros– given the size of foreign exchange bid-ask spreads quoted on the streets of Russia streets, this 12% tax was enormous. The consensus is that the new mechanism for oil and gas payments in roubles, removing them from foreign exchange markets, also had an enormous (upward) impact on the rouble, and their importance has been underlined by the Russia announcement that it will cut off natural gas exports to Bulgaria and Poland, not because of their participation in overall sanctions, but because they have (so far) refused to use the new Euro-rouble payment mechanism (other countries using this mechanism have, so far as WCO knows, had no difficulty with their purchases of Russia natural gas). Also to be noted is that the cumulative impact of the measures to date has been to shrink the two way flow of foreign exchange in and out of Russia. Measures prohibiting the sale of many products to Russia citizens in Russia, and preventing Russians from visiting other countries, have had the effect of helping to improve the Russia balance of payments and thus strengthened the US$ value and the Euro value of the rouble (even as they worsen the living conditions of the average Russian). Complementing the rouble-for-oil/gas payment requirement was a a requirement that exporters convert most of their foreign currency receipts into roubles (it should be remarked similar requirements exist in many developing countries, and had existed in one form or another in Russia until 2006.) Another sanctions related development is that, despite the freeze on Russia fund held abroad, it appears that there still remain Russian funds in non-sanctioned countries and accounts, enough that (so far) Russia has not had to deal with defaults on forthcoming international US$ debt payments, although the next question is how much of these non-sanctioned funds remain, and also whether foreign holders would be willing, if necessary, to restructure these payments to avoid default.

Leon Walras’ description of tâtonnement (“feeling one’s way towards a goal or destination”) gives insights into market maker exchange rate setting in foreign exchange markets (Walras’ focus, much more ambitious, was entire economies). In Walras’ suggestion of how one should think of the way that multiple prices are determined in his theoretical models (composed of mathematical equations expressing quantities supplied and quantities demanded), an “auctioneer” posts a list of suggested prices (like market makers do in foreign exchange markets), which are viewed by “agents” (like market participants who buy/sell foreign exchange for travelling, buying/selling foreign goods, making debt/equity transactions, etc.) In Walras’ description, these participants calculate how much they are willing to supply and demand at these suggested prices, then they write these quantities on “bons” (little pieces of paper, many call them “tickets”) and submit them to the auctioneer, who adds them up (with his or her 19th century spreadsheet), and sees if supply and demand are in balance at these suggested prices. If there is a balance, transaction prices are declared, at which sales and purchases are made; if not, in Walras’ theoretical world, another set of revised prices is posted, and on it goes until the prices are found at which all the markets will clear, and then all transactions take place. But, in modern foreign exchange markets, many of the quantities, to be revealed on the “bons”, are already known and can therefore be reliably estimated: scheduled interest payments and principal payments on loans, seasonal harvests of agricultural goods, releases of important news which may affect exchange rates, and so on, and the market maker can use this information to help him/her set exchange rates which look like they will balance the market – if they don’t balance (because, for example, of unexpected behavior on the part of participants, which can include pure speculators), the exchange rates can be revised instantly and, in emergencies, back-up supplies of foreign exchange are available (a last resort: central bank lines of credit for foreign exchange). Also, even large price revisions are commonplace, such as those associated with the Russia rouble recently, and instances where economic variables are not according to expectations, with consequent large movements in currencies. An additional point is that, in Walras' theoretical model, the suspension of trading until equilibrium prices are determined has an analogy to cases where foreign exchange market trading is suspended due to sell orders being far in excess of buy orders, with a resulting very large movement in an exchange rate. Interesting.

May 17, 2022 update

A growing list of countries have increased policy interest rates, reflecting the increases by the United States, but also because they are feeling the same international inflation pressures. A consequence for countries of not making the same moves as United States (examples are China, Japan and the Euro area) includes currency weakness against the US$. The EU position on its interest rates is complicated by the fact that it will be directly affected by proposed sanctions-driven moves to reduce dependence on Russia oil and gas, and by the presence of increased numbers of refugees from Ukraine. The EU is also implementing the April 14 announcement that net asset purchases by the European Central Bank, (which in May are Euro 30 billion in government securities), will be concluded in July. Australia has increased policy interest rates for the first time in more than ten years, by 25 basis points, and the Australia dollar has weakened below 70 US cents.

 Euros per UK pd and interest rates 2021 to May 2022.png

(World Currency Observer will next be updated on June 1, 2022. 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.)