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

November 2, 2021 (see November 17 update below). Next update: December 1, 2021. Visit Search to look at past issues of World Currency Observer (brochure edition).

WCO continues to pay attention to the evolution of exchange rates and commodity prices over the nearly two years since before the pandemic. There has been a lot of discussion about a key influence on exchange rates, inflation; taking the United States as an example, measurements of inflation rates, reflecting the previous few months, have been getting higher. But, looking forward, at the way views of future inflation rates are embodied in yield curves, WCO is not seeing a lot of evidence of belief that recent rates of inflation will persist. For example, 10 year US treasury bond yields have been rising in the last 3 months, but are still (beginning of November 2021) well below the level they were at before the pandemic (beginning of January 2020). This is also true for 5 and 20 year bonds, with 20 year bond yields closest to their pre-pandemic levels. Another development has been increases in the prices of key commodities, such as the worldwide prices of oil and the more regionally-based prices of natural gas (for the prices of other key commodities, see below). Putting these facts together: longer term interest rates, to the degree that they embody views of future rates of inflation, seem to imply a market belief that recent increases in commodity prices will recede, and a view that the supply chain images of ships lined up at docks will disappear (a huge influence on indices of transportation cost, such as the Baltic indices, are worldwide prices of oil, which are high right now). We will see what will happen, but the evidence to date is sufficient support, for the moment, for those who advocate avoiding the panic button on inflation.

The Canada dollar rose by over 2% against the US$ in October and is up by 4.5% since before the pandemic (the land border to the United States is to re-open on November 8). The Jamaica dollar fell by 4% against the US dollar in October. The Brazil peso continued its September decline against the US$, falling by 1.2% in October, and is 40% below its level before the pandemic. South America currencies which showed strength against the US$ in October were the Bolivia Boliviano, Colombia peso, and the Peru sol. While the Euro was steady against the US$ over the month of October, other Europe currencies were generally up (by 1.5% to as much as 3% in west Europe, and by around 0.5% in east Europe countries) against the US$. The Turkey lira was down by 7.5% against the US$ in October, and is now down by 60% since before the pandemic (Turkey cut the central bank 1 week repo rate by 2 percentage points on October 21, to 16%, very much out-of-step with other central banks around the world). The Russia rouble was up by 3.5% in October 2021, and is down 13% from its value before the pandemic. The Moldova leu moved up slightly against the US$, and down against the Russia rouble, similar to movements by other former USSR currencies which are close to Europe. (Moldova is a small population country which has been faced with a natural gas shortage due to moves by Russia - Moldova is a country which is working to balance conflicting links with the European Union and Russia). The Iran riyal rose by 2% in October 2021 against the US$ (there are some suggestions that the new Taliban government in Afghanistan will be more favorable to Iran as a source of hard currency, in the face of sanctions against Iran.)The Seychelles rupee rose by 2% against the US$ in October. The Australia dollar and New Zealand dollar were up by nearly 4% against the US$ in October; the Japan yen was down by nearly 2.5%. The New Zealand dollar was up by nearly 1.5%. Moving up marginally against the US$ in October were the China yuan and the Japan yen. The Malaysia ringitt rose by 1.22% against the US$ in October 2021, and is now at roughly the same level as it was before the pandemic. Most metal prices are up strongly over the nearly two years since before the pandemic - among these, among the weakest is gold, which has risen by around 17% since that time. Rice prices rose in October, but have continued their downward drift since the beginning of 2021, and are down by nearly 10% since before the pandemic (by contrast, wheat and maize prices are up, in the 40% range, since before the pandemic). Cotton prices rose by nearly 25% in October. The fall in Europe natural gas prices from their previous peaks (attributed to the release of natural gas supplies by Russia) was mirrored in North America, where, for other reasons, natural gas prices fell by nearly 8% in October. World oil prices rose by nearly 8% in October, but market indices of freight rates (which normally reflect world oil prices, as noted above) fell by nearly 25% over the month. North America coal prices rose in October, and are up by nearly 25% since before the pandemic. Coffee prices continued to move up in October (a 5% rise) and are up by 50% since their value before the pandemic.

The U.S. government has levied fines concerning misrepresentations about the hard-currency reserve backing provided by certain crypto-currency issuers of their version of the stablecoin (most cryptocurrencies, however, have no hard currency backing whatsoever). It is interesting that the U.S. Commodity Futures Trading Commission has jurisdiction over such cases, with one reason being that, in the United States, a substantial portion of bitcoin transactions, although certainly not all, must be executed on exchanges. One might have expected, given that bitcoins are used as money, that there would have been more of a role for banking regulators, except that, as often stated by WCO, cryptocurrencies cannot be considered currencies, and this choice of regulator supports our view on this. The techniques followed by the issuer reminded WCO of a period in the 19th century in the United States, when state chartered banks issued money (deposits and notes) which often did not have the sufficient legally-required reserve backing (in some cases, next to zero backing). Some excerpts from the announcement of the bitcoin settlement: “The Tether order finds that since its launch in 2014, Tether has represented that the tether token is a stablecoin with its value pegged to fiat currency and 100% backed by corresponding fiat assets, including U.S. dollars and euros. However, the Tether order finds that from at least June 1, 2016 to February 25, 2019, Tether misrepresented to customers and the market that Tether maintained sufficient U.S. dollar reserves to back every USDT in circulation with the “equivalent amount of corresponding fiat currency” held by Tether and “safely deposited” in Tether’s bank accounts. In fact Tether reserves were not “fully-backed” the majority of the time. The order further finds that Tether failed to disclose that it included unsecured receivables and non-fiat assets in its reserves, and that Tether falsely represented that it would undergo routine, professional audits to demonstrate that it maintained “100% reserves at all times” even though Tether reserves were not audited… Tether held sufficient fiat reserves in its accounts to back USDT tether tokens in circulation for only 27.6% of the days in a 26-month sample time period from 2016 through 2018. The order also finds that, instead of holding all USDT token reserves in U.S. dollars as represented, Tether relied upon unregulated entities and certain third-parties to hold funds comprising the reserves; comingled reserve funds with Bitfinex’s operational and customer funds; and held reserves in non-fiat financial products…..….. The order further finds that Tether and Bitfinex’s combined assets included funds held by third-parties, including at least 29 arrangements that were not documented through any agreement or contract, and that Tether transferred Tether reserve funds to Bitfinex, including when Bitfinex needed help responding to a “liquidity crisis.”… Tether retained an accounting firm to perform a review of Tether reserves on a date Tether selected in advance, and Bitfinex transferred over $382 million to Tether’s bank account in advance of that review.” WCO notes that jurisdictions touched on, besides the United States, included the Bahamas, British Virgin Islands, Ontario (Canada), Panama, Portugal (where certain crypto currency transactions are tax free) and the Seychelles.

 Zambia and copper price November 1 2021.png

WCO remarks on the movements, since before the pandemic. of the world’s leading copper currency, the Zambia kwacha, and the US$ price of copper – the kwacha appears to be having a delayed strengthening, reflecting the more-or-or-less continual upward movement of the price of copper. However, the kwacha fell by 3% against the US$ in October, and is still down by 25% since before the pandemic (the US$ price of copper is up by over 50% since before the pandemic).

November 17.21 update

The annual review of Special Drawing Right allocations, issued by the International Monetary Fund, notes that the August 2021 SDR allocation among the 190 members of the IMF (with individual amounts based on country quotas/equity participation in the Fund), was the equivalent of around US$650 billion, as supported by the G-20 communique in April. This was the fourth allocation (although some would say the fifth), but it was also the second major allocation of SDRs based on quotas- the other major allocation was in 2009, in the wake of the 2008 world financial crisis. The primary mechanism used by countries to exchange their SDRs for currencies of more developed countries is the VTA (voluntary trading arrangement), whereby such transactions are intermediated by the IMF. Funds acquired by member through SDR exchanges can be used for general purposes, including increasing their foreign exchange reserves, conversion into currencies for general uses, and repayments of loans and other financial obligations. The SDR was created in 1969 to supplement the world supply of U.S. dollars, which then (as now) was the world’s major reserve asset, and the creation of the SDR was intended to ensure that a non-U.S dollar reserve asset existed in case eventual reductions in U.S. balance of payments led to a worldwide U.S. dollar shortage (another major source of reserves was gold, from gold mining). Actually at that time, due to U.S. balance of payments deficits and the Bretton Woods system of fixed exchange rates, there was a persistent (and what looked like was going to be an endless) oversupply of U.S. dollars (the dollar glut), so the problem of a U.S. dollar shortage was, at that moment, mostly theoretical. The need for an SDR reserve currency to supplement the U.S. dollar was reduced (some would say, eliminated) when the world turned to more flexible exchange rates against the U.S. dollar in 1971, but the result was that the SDR was established, and has been in place for the 2008 financial crisis, and , now, for the Covid-19 pandemic.

 SDR Euro gold pandemic until Nov 2021.png

With the allocation of the newly issued SDRs (many of which, some anticipate, will be used for the purchase of Covid-19 vaccines by developing countries), the value of outstanding Special Drawing Rights is around US$950 billion, based on around 660 billion in outstanding SDRs, converted to US dollars using a currency basket (US dollars, Euros, UK pounds, Japan yen and China yuan) which is now the equivalent of around US$1.40 for 1 SDR. By contrast, the total value of outstanding cryptocurrencies is an amount which is somewhat above $1 trillion (subject to considerable variation in market value). When it was established in 1969, the SDR value was linked to a specific quantity of gold, chosen so that 1 SDR was worth, at that time, approximately 1$US (if that particular gold link was still in effect, the SDR would be worth around USS$60 now.) SDR valuation moved to a currency basket in 1971, and this basket has been revised over the years, to take account of events such as the introduction of the Euro, and the emergence of the increased importance of the China yuan. The last revision of the basket was in 2016, and the scheduled 2021 revision of the SDR currency basket has been postponed until 2022 because of the pandemic.

(World Currency Observer will next be updated on December 1.21. 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.)