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World Currency Observer
World Currency Observer

Exchange Rates: one year high and low

April 4, 2017 (see April 19 update below). Next update: May 3, 2017. Visit Search to look at past issues of World Currency Observer (brochure edition).

The Euro rose by around 1.5% against the US$ in March, and the Japan yen was up by nearly 3%. The Mexico peso rose by around 4% in March, and is now at 18.8/US$, which is around 14% above its mid-January low of 21.9/US$. Caribbean currencies were generally stronger against the US$ in March. The Brazil real fell by a little in March, and is now 11% stronger against the US$ than this time last year. The Chile peso fell around 2.5% on the month. The UK pound rose by around 2.5 % against the US$ in March, and was up by around 1% against the Euro. The Uzbekistan som was down nearly 6% on the month against the US$ in March, and the Tajikistan somoni fell by 2.7% – other former-USSR currencies were stronger in March against the US$. The Egypt pound rose by around 16% in March against the US$. The South African rand moved from 13/US$ at the beginning of March, to 12.4/US$ by March 24, and then began falling, and, then, fell even more after the dismissal of the Minister of Finance, reaching 13.4 at the end of the month. Currencies in Asia were generally stronger against the US$ in March.

In the middle of March, Iceland lifted its remaining controls on capital outflows, which were a legacy of the Iceland banking and currency crisis that reached its height in 2008. Part of this process is the reimbursement of foreign holders of in-Iceland assets (total: 200 billion krónur) at a rate of 0.00727 Euros per króna, which is about 15% less than the market Euro/1 króna rate in the middle of March. The removal of controls is comprehensive, as indicated in the following quote from the announcement: “ In general, households and businesses will no longer be subject to the restrictions that the Foreign Exchange Act places on, among other things, foreign exchange transactions, foreign investment, hedging, and lending activity; furthermore, the requirement that residents repatriate foreign currency has been lifted. These are the items that have had the greatest impact on households and businesses since the capital controls were introduced in autumn 2008. With the amendments, foreign investment by pension funds, funds for collective investment (UCITS), and other investors in excess of the maximum amounts provided for in the Foreign Exchange Act, which until now have been subject to explicit exemptions by the Central Bank, will now be authorised. Furthermore, cross-border transactions with krónur are now authorised. Foreign financial undertakings will therefore be authorised to transfer krónur and financial instruments issued in domestic currency to and from Iceland.” Exceptions, intended to help ensure that Iceland does not end up in the same situation again, include: notifying the central bank of large capital account transactions; restrictions on those króna transactions in the spot, forward, derivatives and lending markets which are viewed as speculation-motivated; and also the following: “reserve requirements for specified investments in connection with new inflows of foreign currency will…remain in place.

With the view being expressed by some Americans that the German current account surplus (current account=net exports of goods and services plus net income inflows plus net transfers) with the United States is linked to the Euro being overvalued against the US dollar, WCO thinks it is interesting to focus on the European Union attitude towards the impact of the German current account on other EU members, and on the reasons why this surplus exists. The EU has a Macroeconomic Imbalances Procedure (MIP), to classify imbalances (not just current accounts, but other variables such as budget deficits, public debt, unemployment, etc) on the basis of whether they impact individual EU contries, or the EU as a whole. Imbalances can be further classified as to whether or not they are “excessive”. An example of something classified as an excessive imbalance is the level of non-performing bank loans in Cyprus. The German current account is considered to be an EU imbalance, but not excessive, and is said to exist because Germany saves too much and does not invest enough (private and public). Measures suggested to cure this include more public spending, but also other items to stimulate investment, such as liberalising restrictions in the service sector and a more efficient tax system.

With our Florida (USA) perspective, World Currency Observer is watching closely how the BREXIT process to withdraw the United Kingdom from the European Union (which officially started last week) deals with the issue of health insurance for UK expatriates who have retired in EU countries. At the moment, EU rules ensure that retirees are covered by the national insurance of the country where they reside, with the UK government reimbursing expenses – this mechanism will evaporate when the UK withdraws from the EU in two years or less. A BBC report, based on a Freedom of Information request in the UK, indicates that the more than 140,000 UK expats in the EU using host-country health care are nowhere near offset by the just 4,000 EU expats in the UK in the same situation. There are around 30 countries involved, so if the UK-EU BREXIT process chooses to ignore this issue, a large number of bilateral agreements will be necessary, assuming that the EU host countries even want to deal with this issue at a governmental level. Is it safe to assume that the vast majority of such UK expatriates living in the EU would have been strong opponents of BREXIT?

WCO’s attention has been drawn to the Liberia foreign exchange regime, an example of a US-dollarized economy which copes with not only a foreign export/import-based foreign exchange market, but also with an in-country market for the back-and-forth conversion of Liberia dollars to US dollars. More on this in the WCO update on April 19.

April 19, 2017 update

Czech koruna April 2017

In the Czech Republic (population 11 million), which is managing what is perhaps the strongest economy in the world, the Czech National Bank says it will stop targeting a floor of 27 koruna/1Euro as part of its approach to monetary policy (which it has been doing since November 2013), and will focus on interest rates, targeting the level of inflation (“péče o cenovou stabilitu”/“maintain price stability”). The koruna is currently at 25/1$US and at 26.8/1Euro. The countries bordering the land-locked Czech Republic are: Slovakia, Poland, Austria and Germany (Bavaria/Bayern and the former East Germany).

A few remarks on dollarisation: the extent to which a country is (US$) dollarised is the amount of use of the US dollar for day-to-day transactions rather than its own currency. The classic reason why a country becomes dollarised is over-supply of the domestic currency, leading to very high inflation, so residents prefer to use a hard currency, generally the US dollar. So, one way to work towards de-dollarisation is to reduce the over-supply (such as tight monetary policy), which generally leads to a strengthening of the exchange rate. Another, more drastic, method is restricting foreign currency holdings of residents, such as requirements to convert to the domestic currency. The degree to which dollarisation is possible (and an avenue for reversal) depends on the laws of the country, such as whether in-country contracts can be denominated in foreign currencies, whether creditors are required to accept the domestic currency for debt repayments, whether governments will accept foreign currency for payment of taxes, and so on. In the dual currency group of dollarised countries, both the US dollar and the home currencies are used - the leader right now of this group, by its own admission, is Liberia, on the west coast of Africa. An example of a triple currency country is Cambodia. Another group of dollarised countries includes countries that have had to totally abandon their own currency, like Ecuador and Zimbabwe.

(World Currency Observer will next be updated on May 3, 2017. Visit Search to look at past issues of World Currency Observer (brochure edition).)