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World Currency Observer
World Currency Observer

Exchange Rates: one year high and low

February 1, 2018 (see February 14 and February 21 updates below). Next update: March 1, 2018. Visit Search to look at past issues of World Currency Observer (brochure edition).

A story that fits many currencies around the world in January 2018, such as the Japan yen, was significant strength against the US$, and a smaller upward movement against the Euro. The Euro started the first month of 2018 with a rise of nearly 3.2% against the US$, adding to its 2017 strength. There was a big jump for the Mexico peso in January 2018, up nearly 6%, leaving it 12% stronger against the US$ since this time last year The strongest January movement by South America currencies in January was the Brazil peso, which was up by 5% against the US$. Most other South America currencies rose against the US$ in January, with one of the exceptions being the Argentina peso, which fell by 4.5% on the month, and by nearly 23% since this time last year. The UK pound was up in January 2018 by nearly 5% against the US$, and up by more than 1% against the Euro. The Turkey lira continued its December 2017 rise against the US$ with a further strengthening, which, however, left the lira down by around 3.5% against the Euro in January, and down by over 15% against the Euro since this time last year. The Russia rouble rose by nearly 2.5% against the US in January, and the Ukraine hryvnia fell by around 3.5% on the month - the hryvnia has fallen by 6% against the US$ since this time last year. The Israel shekel rose by nearly 2% against the US$ in January, and is now up by over 11% since this time last year. The Egypt pound moved up a little in January against the US$, leaving it 2% stronger than this time last year. The Iran riyal fell by over 9% against the US$ in January, and has fallen by over 15% against the US$ since this time last year. Another monthly increase by the South Africa rand against the US$ in January 2018 leaves it 12% stronger against the US$ than this time last year, and down by around 2% against the Euro since this time last year. The Mauritius rupee rose by 4% against the US$ in January, and is up over 9% since this time last year. 0 The South Korea won paused, during January, its recent upward movement against the US$. But, in general, currencies in the Pacific Rim and in other parts of Asia showed significant strength against the US$ in January. For example, the Malaysian ringgit moved up by 4.3% against the US$ in January, and up by 1% against the Euro. Among the exceptions to the upward movement was the India rupee, which moved up by around 0.5% against the US$ in January. World oil prices rose by around 8% on the month, and are now up by around 25% against the US since this month last year. Gold prices also moved up in January.

Against the backdrop of continued strength in the Euro, WCO focused on the European Central Bank indication (January 25) that European policy interest rates will remain unchanged for some years to come. Among the key excerpts from the press release and the public statement by governor Draghi: “… based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. We continue to expect them to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases… domestic price pressures remain muted overall and have yet to show convincing signs of a sustained upward trend. Against this background, the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium-term outlook for price stability…Euro area annual HICP inflation was 1.4% in December 2017, down from 1.5% in November. This reflected mainly developments in energy prices… All [EU] countries would benefit from intensifying efforts towards achieving a more growth-friendly composition of public finances…We don't target exchange rates and we say exchange rates are important for growth and for price stability. Now, certain movements in the exchange rates to the extent that are justified by the strengthening of the economy are part of nature. It's a fact of nature, so the issue is whether these other movements in the exchange rate which may be caused by the use of language that I said is not part of the terms of reference that been agreed recently, whether that has an effect on our inflation path. We look at inflation; that is our main concern. It's too early to assess whether the pass through [to inflation] has already taken place and what's going to be the extent of this pass through... It's pretty clear that very large movements in the exchange rate are bound to have a pass through… The effect on banks of negative rates, also we have shown several times that taking into account all the effects of our policies, that on average they have been favourable to profitability – which by the way has been increasing. The banks have been increasing profitability; still low, yes, but increasing, which again shows that the policy of negative rates has been absorbed by the banking sector and has not created a problematic overall situation to financial stability.” Questions to governor Draghi on January 25 made use of phrases not in his statement, such as “dollar weakness” and “movements in oil prices”, and there was a question regarding what it means for EU perceptions of inflation that commodity prices are denominated in US dollars, at a time when US monetary policy is apparently on the normalisation track (i.e., higher interest rates to come). The latter question led to the following response:”… in defining our objective of inflation we use several measures. We use headline inflation, which includes these effects but we also use underlying inflation which excludes food and energy. Then we have other definitions of inflation as well. All this, mind, our objective is defined in terms of headline inflation.

WCO continues to assess the evolution of United States trade policy in the Trump era, such as: tariffs on imported washing machines and solar panels; the growing possibility of a post-BREXIT trade deal with the United Kingdom; and the surprise pro-Bombardier trade ruling (against the US manufacturer Boeing) by the US Department of Commerce, in the aerospace industry, reversing an earlier ruling by the same US government department (see February 21 update below on a recent change in India trade policy).

February 14, 2018 update

One country which features active political discussion of the value of its currency is Israel, where the increasing strength of the Israel shekel against the US$ has been a source of concern, leading to a reported announcement, by the chairman of the Knesset finance committee, that he will bring forward legislation to force action by the Bank of Israel and the Israel Minister of Finance (There were media reports of large purchases of US dollars in the latter part of January by the Bank of Israel, in order to weaken the shekel. Recent remarks by a Bank of Israel official included the following: “In January 2018, the Bank of Israel intervened significantly in the foreign exchange market, including after it identified significant selling activity based on models. The major intervention halted the appreciation of the shekel, despite the marked weakness of the US dollar vis-à-vis the other major currencies.”) Other reported commentary in Israel includes quantification of the sector economic impact of shekel appreciation - the Manufacturers’ Association of Israel has issued an estimate of the impact on total business revenue of the 2017 strength of the shekel (this association makes regular remarks on the shekel). Among Israel manufacturers, there are reports of remarks by the members of the politically-strong (and economically very important) Israel high technology sector, that they will lobby the government to moderate shekel strength, threatening otherwise to move jobs abroad. Among manufacturers, one important psychological level of the shekel is 3.50/1$US.

And, to continue the theme of in-country political discussion of the impact of the strength of the local currency on competition in export markets, the rice exporting association in Thailand has reported remarks (quoted in an article linked to the Bangkok Post web site) which include quantification of the estimated US$ per tonne of rice impact of a one baht/1$US appreciation against the US dollar. The current US$ equivalent of the baht price of price of a tonne of white rice exported from Thailand is in the range of $450 per tonne, and, for the famously fragrant jasmine rice, around US$1200 tonne. Remarks by a prominent rice trader (quoted in the same Bangkok Post web site article) indicate belief that the weakness of the Vietnam dong against the Thailand baht is playing a significant role in rice export competition between the two countries. (The Thai baht has been up more than 10% against the US$ since this time last year, compared to around zero net movement for the Vietnam dong since then.)

 Israel shekel and Thailand baht Feb 2018

February 21, 2018 update

The following is an excerpt from the government of India All-Union Budget of February 1, which is receiving more international attention following a Financial Times article (Mary Lovely/Devashish Mitra): “In this budget, I am making a calibrated departure from the underlying policy in the last two decades, wherein the trend largely was to reduce the customs duty. There is substantial potential for domestic value addition in certain sectors, like food processing, electronics, auto components, footwear and furniture. To further incentivise the domestic value addition and Make in India in some such sectors, I propose to increase customs duty on certain items. I propose to increase customs duty on mobile phones from 15% to 20%, on some of their parts and accessories to 15% and on certain parts of TVs to 15%. This measure will promote creation of more jobs in the country.” More discussion of the change in direction by India in future WCOs.

(World Currency Observer will next be updated on March 1, 2018. Visit Search to look at past issues of World Currency Observer (brochure edition).)