September 5, 2018 (see September 19 update below). Next update: October 3, 2018. Visit Search to look at past issues of World Currency Observer (brochure edition).

Many currencies around the world weakened in the first part of August 2018 against the US$, reaching a bottom on or about August 15. After that, while most currencies (such as the China yuan and the Euro) strengthened over the last part of the month (despite little down-tics in the last week against the US$), there were exceptions, which included the India rupee, the Japan yen and the Malaysia ringitt (there was lots of talk about "record lows" over various periods of time for these currencies against the US dollar). For example, the Canada dollar bottomed-out around August 15, but then end-of-month strength after the earlier weakness meant that the Can$ finished August with little net change on the month. The Mexico peso was on track for a similar pattern, but weakness in the last week of August meant that it finished the month 3.5% weaker against the US$. The Jamaica dollar showed a further 3% fall in August against the US$ after a 2% decline in July, leaving it down nearly 7.4% against the US$ since this time last year (almost exactly the same movements as the Mexico peso) - the only currency in the Caribbean and Central America showing more movement was the Haiti gourde, which is down nearly 10% since this time last year. The Argentina peso fell by nearly 33% in August against the US$, a month in which the central bank pushed its main policy interest rates up to 60% (the highest in the world right now for a non-hyperinflation country) to reduce inflation and (mirror image) prevent further declines in the peso - recent statements by International Monetary Fund officials suggest solid support by the IMF for the strong Argentina policy moves at the end of August, including a tax on exports. The Brazil real was down nearly 11% in August, and by 32% since this time last year. (Argentina and Brazil currency movements since this time last year have shown much more weakness against the US$ than any other South America currency movements.) The Euro ended 1% weaker in August against the US$, and 2.5% weaker than this time last year. The United Kingdom pound weakened by a little over 1% against the US$ in August, leaving it at almost the same level it was at a year ago, but up since a year ago against the Euro by over 2%. There were strong downward movements in August by the Norway krone and the Sweden krona. The Hungary forint fell by nearly 2% against the US$ in August, and is down over 10% against the US$ since this time last year. And another large drop for the Turkey lira, which, at the current level of 6.75/1US$, is around half of what it was against the US$ one year ago (3.44 lira/1$US). The Russia rouble was down over 9% in August against the US$, and the Ukraine hryvnia was down by nearly 5%. A 12% fall in the South Africa rand against the US$ in August left the rand down by 13.5% since this time last year. The Angola kwanza is down by 66% against the US$ since this time last year (Angola, one of Africa's leading oil producers, has approached the IMF for financial aid). The Tunisia dinar fell by 2.5% in August, after a 2% drop in July against the US$ in July, leaving it down nearly 13% since this time last year The Australia dollar fell by 3% on the month against the US$, after showing weakness in the last week of August - the New Zealand dollar showed similar movement. The movement of the Japan yen over the month of August was much different than other currencies, but there was little net change over the entire month. The India rupee fell by 3.5% against the US$ in August, and is down nearly 11% since this time last year. The Pakistan rupee and the Thailand baht both moved up by over 1.5% against the US$ in August, but the Pakistan rupee is down by 17% since this time last year, while the baht was up by over 1%. The Malaysia ringgit is up nearly 4% against the US$ since this time last year. Worldwide oil prices are in the $70-80 a barrel range, up 50% since this time last year. Metals prices in US$ are generally substantially below what they were a year ago, with one exception being aluminum, which is unchanged.

Two currencies which have had orderly, unforced redenominations in 2018 (over a 6 month period) are the dobra (1000 to 1) of São Tomé and Príncipe (population: 200 thousand) and the ouguiya (10 to 1) of Mauritania (population 4.5 million), both of which are cash-based economies with perhaps less reliance on bank deposits than most other countries. The redenomination process for any currency starts with an application for a new Isocode (“amendment”) – in world currency market trading systems, the Isocode of the currency is more important than the name of the currency (the list of countries with pending applications, suggesting future redenomination, is interesting). São Tomé and Príncipe is dependent on cocoa exports, has been a client of the IMF since 1987 (following a worldwide cocoa price slump), and has a heritage of Marxist-Leninist influence in its approach to government for most of the years (less so recently) since its independence from Portugal in 1975. Physically, STP consists of equatorial islands off the Central Africa coast of Gabon (Gabon uses the Central Africa CFA franc). The dobra has been pegged to the Euro since 2010 at 24500 (now revised to 24.5) –it was converted from the former Portugal escudo at 1:1 with independence. Mauritania is an Islamic republic in the Sahara desert region of Africa, with a west Africa coastline, and exports dominated by metals, mostly iron ore. The slogans for the ouguiya redenomination include: moins de chiffres, même valeur (less figures, same value); and une ouguiya 10 fois plus fortes (an ouguiya 10 times stronger). The central bank of Mauritania published an analysis of the benefits of the redenomination of the ouguiya: simplification of counting due to smaller denominations, some of which will now be coins instead of paper; fighting inflation by reducing the rounding-up that occurs with small-value low coin denominations; reducing counterfeiting by using new polymer-based bills; the imposition of a maximum permitted cash switch, so that holders of large currency amounts are forced to use the banking system, thus increasing the size of the banking system, and also reducing money laundering. The value of the ouguiya, which was introduced in 1973 to replace the CFA franc (used by former French colonies in central and western Africa) has been steady for the last couple of years against the US$, at around 350/1$US (35 in the new currency).

September 19, 2018 update

The central bank of Turkey raised its principal policy interest rate by 625 basis points on September 13 (1 week repo rate, from 17.75% to 24%), noting that “the Monetary Policy Committee has decided to implement a strong monetary tightening to support price stability”. The latest monthly inflation figure was for August, with prices up by 2.3%, which suggests inflation in Turkey may rise far enough above the latest year-over-year rate of 16.6% that the announced interest rate hike may not be sufficient, in itself, to support the Turkey lira, even though both the European Central Bank and the Bank of England both did not change their interest rates at their regular setting in the past week.

Nomura securities has introduced what it calls the Damocles index, intended to predict which countries will have currency crises (rapid falls in exchange rates) over the next year. Countries identified as high-risk (over 100) are Sri Lanka, South Africa, Argentina, Pakistan, Egypt, Turkey and Ukraine. Countries with zero ratings, indicating low risk, include; Brazil, Bulgaria, Indonesia, Kazakhstan, Peru, the Philippines, Russia and Thailand Nomura statements suggest the best thing about the index is that it distinguishes among emerging economies, so that they are not all lumped together for currency analysis purposes.

There are many media articles marking the 10 years since the 2008 financial crisis, which started when the US housing market crashed, causing problems for the banks due to their large portfolios of housing-based lending, and, ultimately, many slow years for the world economy. And it is a reminder that it was only a number of years after 2008 that the extent of the foreign exchange dimension of the crisis was revealed, that banks outside the US were caught holding piles of worthless US dollar debt unavailable to service their foreign exchange deposits, which was alleviated when US treasury and bank officials provided emergency US dollar funding to major banks around the world.

WCO read with interest the following statement by the EU on reducing the worldwide role of the US dollar, wondering if this idea might actually be gaining traction worldwide-so far, Russia has been the most important country talking about reduced use of the US dollar, and Russia is a major exporter of US$-priced natural gas to the EU. The EU statement, part of the annual EU State of the Union Address, is as follows: “By next year, we should also address the international role of the euro. The euro is 20 years young and has already come a long way – despite its critics. It is now the second most used currency in the world with 60 countries linking their currencies to the euro in one way or another. But we must do more to allow our single currency to play its full role on the international scene. Recent events have brought into sharp focus the need to deepen our Economic and Monetary Union and build deep and liquid capital markets. The Commission has made a series of proposals to do just that – most of which now await adoption by Parliament and Council. But we can and must go further. It is absurd that Europe pays for 80% of its energy import bill – worth 300 billion euro a year – in US dollar when only roughly 2% of our energy imports come from the United States. It is absurd that European companies buy European planes in dollars instead of euro. This is why, before the end of the year, the Commission will present initiatives to strengthen the international role of the euro. The euro must become the face and the instrument of a new, more sovereign Europe. For this, we must first put our own house in order by strengthening our Economic and Monetary Union, as we have already started to do. Without this, we will lack the means to strengthen the international of role of the euro. We must complete our Economic and Monetary Union to make Europe and the euro stronger.”

It is hard to measure the Eritrea to Ethiopia (nakfa to birr) exchange rate effect from the opening of the border between Eritrea and Ethiopia, for the first time in 20 years. Eritrea, a breakaway former province of Ethiopia that is often called the North Korea of Africa, has a parallel market with an exchange rate different than the 15 nakfa/1$US official rate, but it is highly illegal and very risky to use, with reports that foreigners have been arrested for currency trading violations. In addition, in January 2018, the government cracked down on illegal use of the nakfa –before this crackdown, indications are that the parallel market premium had been small, but it has spiked since then. The effects of the absence of war and the opening of the border are offset by the fact that Eritrea is still under UN sanctions.

And, more US tariffs on China have been announced. “China is engaged in numerous unfair policies and practices relating to United States technology and intellectual property – such as forcing United States companies to transfer technology to Chinese counterparts…additional tariffs on roughly $200 billion of imports from China. The tariffs will take effect on September 24, 2018, and be set at a level of 10 percent until the end of the year. On January 1, the tariffs will rise to 25 percent. Further, if China takes retaliatory action against our farmers or other industries, we will immediately pursue phase three, which is tariffs on approximately $267 billion of additional imports.”

(World Currency Observer will next be updated on October 3, 2018. Visit Search to look at past issues of World Currency Observer (brochure edition).)