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

July 1, 2021 (see July 20 update below). Next update: August 3, 2021. Visit Search to look at past issues of World Currency Observer (brochure edition).

The US$ was generally stronger against other currencies around the world in June, by a range between 2% and 4%, moving upward steadily throughout the month. General exceptions to this included South America currencies, and currencies of countries which were members of the former USSR. Some attribute the June upward movement of the US$ to a view that the United States Fed has affirmed its willingness to raise interest rates if there are signs that US inflation will remain on the high side; others see this as reflecting a consensus that US inflation will moderate from its current pace. Looking at some particular currencies: the Mexico peso was up slightly against the US$ in June, and is down by 5% since before the Covid-19 pandemic. The Brazil peso rose by 10% against the US$ in June, and is down by 25% against the US$ since before the pandemic. South America currencies were generally steady against the US$ in June. The Euro fell by more than 3% against the US$ in June, but is still up by 5.5% since before the pandemic. The Ukraine hryvnia was up by 1% against the US$ in June (down 16% since before the pandemic). The Vietnam dong rose slightly against the US$ in June, and is stronger than it was before the pandemic. Metals prices in US dollar terms were generally down in June, including a 6% fall in the price of gold (up 18% since before the pandemic). Oil prices rose by around 10% in June, and are up by 15% since before the pandemic. Soybean prices in US$ terms were down by 13% in June, and are up by 43% since before the pandemic. World rice prices, on average (among the large number of varieties), are, roughly, where they were before the pandemic.

Changes in tariffs (and other taxes on imports and exports) have the same type of impact as exchange rate movements, so analyses of the economic effects of exchange rate movements must incorporate these effects to be complete. One example: it is interesting to see the variety of tariff structures among the fixed exchange rates of Caribbean area countries. As the world continues along an uneven recovery from the pandemic, there are some examples of recent and forthcoming tariffs and foreign tax changes, aside from the recent G-7 heads-of government move, and the July 1 OECD 130 country statement, towards a minimum international corporate tax rate (which still has some way to go, including adoption by the G-20 in the fall, and, if agreed there, towards implementation). Among these is the imposition, starting July 1 (scheduled to begin on January 1, but postponed because of the Covid19 pandemic) by the European Union of Value Added Tax (at a 25% rate) on on-line purchases from foreign countries. Looking at other such changes around the world: there have been signs of a renewed push for ratification and implementation of the trade agreement between the EU and Mercosur (Argentina, Brazil, Paraguay, Uruguay plus associated/suspended countries) which was signed a year ago, and which will, when implemented, remove tariffs from 90% of trade between the two blocs. Within the Mercosur area, Brazil suggested, in March (in support of a proposal by Uruguay) that Mercosur countries implement a unilateral 20% reduction (10% now and a further 10% by the end of the year) of Mercosur’s Common External Tariff, the TEC, (0 to 20%, depending on the good), a proposal which appears to be on the road to rejection, although only after a great deal of discussion and analysis of the overall tariff structure in the Mercosur group (Brazil had already gone ahead with tariff reductions on a broad variety of goods). Among the goals of the unilateral tariff reduction measure, as promoted by the Minister of Economy for Brazil, is to make Brazil producers more efficient and productive (due to greater competition from imports) and to facilitate greater participation by Brazil industry in international supply chains.

 Pakistan remittances 2018 to April 2021.png

The World Trade Organization’s latest Trade Monitoring Report, covering G-20 countries, indicates that the volume of world trade, in goods and services, had likely never been higher in history than it was in 2019, just before the pandemic. With the onset of the pandemic, world trade fell sharply, reaching a bottom in the summer of 2020, but it has risen sharply since then, and continues to rise, although still somewhat below the pre-pandemic peak. But what WCO found even more interesting is that the WTO Goods Trade Barometer (of future trade activity) has reached a level which is well above its pre-pandemic high. By contrast, the complementary Services Trade Barometer of actual trade, in the early part of 2021, did not, at that time, appear to have rebounded as much as the measurement of actual goods trade. The Goods Trade Barometer (quarterly, last issued in May), summarizing a mix of values and physical units, is intended as a forward look at the volume of international trade, and includes new export orders, automobile production, container flows through ports, and electronic components trade, all measured for the G-20 group of countries. The WTO Services Trade Barometer (services index, semi-annual, last issued in February, next issue in July) includes services trade data extracted from purchasing manager surveys, global financial transactions, electronics components transactions, passenger air traffic (in February, this was still had not moved much above its pandemic low), container port flows and building permits. As part of its analysis of international trade activity, the WTO also itemizes, country by country across the G-20, new measures which enhance or restrict trade. In this regard, the WTO noted that its data indicate that there were 140 new trade related measures affecting goods trade since the pandemic began, either to facilitate trade or to conserve certain types of production for home markets (many were tariff and tax reductions on trade in pandemic medical supplies and equipment).

July 20, 2021 update

The press release with the latest (June 2021) inflation numbers for the United States pretty much says it all: United States consumer prices up 0.9% in June (more than 11% on an annual basis); 50% higher than the May rate of 0.6%; the largest single month increase since a 1% increase in June 2008, which was in the middle of the United States Great Recession. But the resulting direction for the US dollar against other currencies is not yet clear, because the raw inflation comparisons, which influence exchange rates with other countries, are being overwhelmed by conflicting views regarding likely reaction (especially changes in interest rates) by government authorities (such as that of the United States central bank, the Fed), and the effects of enhanced government spending by the US administration (President Biden), and the actions of other countries - all of this against a background of an uneven recovery from the Covid-19 pandemic.

What we currently refer to as the fixed exchange rate regimes of the 19th century, up until World War I, (fixed currency values for units of gold and silver) were nowhere nearly as rigid as the fixed exchange rate regimes since World War II, and are therefore not strictly comparable, particularly with regard to adjustments in trade flows. In the 19th century, a foreign purchaser of English pounds for commercial purposes did not usually purchase pound notes and bank deposits, but, in most cases, would purchase a bill of exchange payable in pounds on a certain date in London. Such an English pound bill of exchange originated from an exporter in another country, who had “billed” an English importer. The exporter in the other country would, however, not remit the bill directly to the English importer, but would sell the bill in her own country for her home currency immediately after shipping the goods to England. And who, in her home country, would want to buy a bill payable in London in English pounds? It would be an importer in the home country, who would then send the bill to the English exporter (across the English Channel, across the Atlantic Ocean, or from the other side of the world), who would then present it to the English importer for English pounds. The system worked best, as it does today, when one currency was used to denominate the bills (at that time, the English pound, and the U.S dollar since World War I). There was an important role for intermediaries, such as merchant banks, which could sort out the matching of bills that didn’t exactly match (amounts, due dates, etc.), finance short-term imbalances of bill remissions on their books, and were also in a position to take advantage of short-term imbalances and initiate offsetting (and profitable) transactions in goods on their own account. The premium on bill of exchange rates was (more or less) limited to the cost of transmitting and converting specie (gold mostly, in some cases it was sliver) from one currency to another, but even this could be exceeded, temporarily. (In the words of Goschen, bills of exchange allowed the world to avoid “the trouble of packing, insuring and dispatching gold”). It all added up to exchange rate regimes with a great deal of flexibility, including exchange rates which fluctuated within the wide band indicated by the cost of transporting gold (premiums=depreciation and discounts=appreciation), which were wider than the +/-1% bands often quoted today. Not what we think of today when we mention “fixed exchange rates”.

(World Currency Observer will next be updated on August 3, 2021. 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.)