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World Currency Observer
World Currency Observer

Exchange Rates: one year high and low

March 1, 2018 (see March 6 and March 14 updates below). Next update: April 4, 2018. Visit Search to look at past issues of World Currency Observer (brochure edition).

In Europe, the Euro fell by 0.8% against the US$ in February, still up by more than 14% since this time last year. The Sweden krona fell against the US$ in February by 3.5%, and the United Kingdom pound fell by 1.5%, and both of these currencies also fell against the Euro. The Czech Republic koruna and the Polland zloty both fell by a little more than 1.5% against the US$ in February; the Hungary forint fell by 2.4%. The Canada dollar fell by 3% in February against the US$, and the Mexico peso fell by 1%. The Haiti gourde fell by 1.6% against the US$ in February, but is up nearly 5.5% since this time last year. The Chile peso increased by around 2.% against the US$ in February, the Peru nuevo sol was up by 1%, and the Brazil real fell by 2.5% (see below for news on the Venezuela bolivar). The Argentina peso fell by around 3% in February. There was a sharp upward movement, by over 6%, of the Ukraine hryvnia against the US$ in February, translating into a 6% rise against the Russia rouble. In Iran, the parallel rate of the rial (generally around 25% above the official Bank of Iran rate)rose by 1% in February; there were reports of a government crackdown on private sector foreign exchange dealers in Tehran and elsewhere in Iran. The Yemen rial fell by 19% in February against the US$. The South Africa rand was up by 2.5% against the US$ in February, adding up to a 10% rise against the US$ since this time last year. The Seychelles rupee fell by nearly 4% in February against the US$. The Australia dollar fell by over 3% against the US$ in February; the Japan yen rose by nearly 1.5% against the US$, while other Pacific Rim currencies generally fell slightly. The India rupee fell by nearly 2% against the US$ in February, and is up nearly 3% against the US$ since this time last year. The Pakistan rupee rose slightly against the US$ in February.

The text of the Trans-Pacific Partnership, modified to take account of United States withdrawal from participation, was released on February 20/2018, and is to be signed on March 8/2018, with faster-than-usual ratification expected to take place in the coming months. (Signatories are Japan, Canada and Mexico, Australia and New Zealand, Malaysia and Singapore and Brunei, and Vietnam). The TPP was signed on February 4/2016, and then the United States withdrew, on January 30/17, from what was a US-initiated deal –this move was considered the "first strike" in the new United States approach to trade policy. The WCO approach to international trade and investment agreements is to focus on the quantitative terms of the agreement (movements in tariff and duty rates, generally applied to invoiced values) that are a substitute for exchange rate movements and, from this perspective, the TPP has a wide number of changes in tariffs and duties on specific agricultural products (edible and forest products), with a wide variety of implementation times (ranging from reduction immediately after ratification, to as long as 15 years for some products). The same general statement applies to many industrial goods, including minerals and to specific manufactured goods, particularly steel, but also industrial machinery, chemical and plastic products. Among the sub-plots of multi-nation agreements are the embedded bilateral arrangements, and, for the TPP, one of these is movement by Japan for greater access to North American automobile markets (changes in content rules for tariff-free access), set against the interest of the North American signatories (Canada and Mexico) for more access to Japan agricultural markets (regarded as highly protected). Another such sub-plot is greater access for Vietnam textiles to Japan, although this is less than the original hope of Vietnam in entering the TPP, which was for greater trade with the United States. Yet another sub-plot is how much the TPP improves on the 2014 Australia-Japan free trade agreement (JAEPA).

WCO has been reviewing something we found interesting (although not, it turns out, of great importance) back at the end of January, which were remarks by US Treasury Secretary Mnuchin, reported by many sources, that "obviously, a weaker dollar is good for [the United States] as it relates to trade and opportunities". These sources also suggested that he modified his remarks over the next day or so. Criticisms of Mnuchin’s statements seemed to dwell on several concerns: that the US was thinking about engineering a devaluation of the US dollar as part of its trade offensive; that, by saying anything at all, he was contributing to currency movements not based on fundamental factors; and that he was violating previously-agreed upon terms of reference on currency markets. Examining the latter, WCO reviewed references to currency movements in communiques from previous G-20 Economic Summits. In recent years, these communiques either explicitly state currency policy, or state that previously stated policies will continue. From the 2016 Germany Summit:”We reiterate that excess volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. Our relevant authorities will consult closely on exchange markets. We reaffirm our previous exchange rate commitments, including that we will refrain from competitive devaluations and we will not target our exchange rates for competitive purposes. We will carefully calibrate and clearly communicate our macroeconomic and structural policy actions to reduce policy uncertainty, minimize negative spillovers and promote transparency.” And, from the 2013 Russia Summit: “We reiterate our commitments to move more rapidly toward more market-determined exchange rate systems and exchange rate flexibility to reflect underlying fundamentals, and avoid persistent exchange rate misalignments. We will refrain from competitive devaluation and will not target our exchange rates for competitive purposes. We will resist all forms of protectionism and keep our markets open.” WCO adds that the traditional US policy notion of a strong dollar was never equivalent to an appreciating dollar – by the same token, advocating a weaker dollar at a point in time does not contradict a strong dollar policy. Still, it is easy to see why EC governor Draghi, among others, felt the need to reiterate recent commitments regarding high-level currency management. More on this in future WCOs.

Venezuela, which is living with hyperinflation and, as a result, with a currency which has fallen to roughly 226,000 bolivars/1US$ (in the free market which exists primarily near the Venezuela border with Colombia), took moves in February to redress the situation. Part of the problem has been the government DIPRO official exchange rate of just 10/1US$, which was heavily used -this rate was eliminated at the end of January. Taking the place of the DIPRO is the DICOM exchange rate, based on foreign currency sold by government auction – the DICOM auctions had been suspended in September 2017, but were revived in February. The first DICOM exchange rate after the suspension of the DIPRO rate of 10 was the 3345/1US$ rate established at the September 2016 auction, but the February auctions resulted in exchange rates which better reflected the bolivar weakness apparent from the parallel market - first to around 25000, and then to around 29000/1US$ at the next auction. The Venezuela government also, in February, went ahead with the launch of its previously announced virtual currency (i.e., bitcoin clone), the Petro, with a price that it says will move with the price of oil, and which will be backed by the government – WCO will be interested in seeing how the price of the new currency will move in relation to the bolivar, in the context of the new Venezuela exchange rate structure.

March 6, 2018 update

 China March 2018

The China renminbi yuan is close to the 6.20/1US$ it was at back in early 2015, although progress towards this important psychological level has reversed somewhat in the last few days. The yuan was at 6.20/1US$ for the first few months of 2015, but then weakened steadily over the next year-and-a-half, moving to around 6.9 in the first few months of 2017, a movement widely regarded as due primarily to capital outflows from Chinese nationals moving funds abroad, which was generally viewed as being regarded as undesirable by the government of China, and as the reason for the implementation of a number of measures to slow capital outflows. Since early 2017, the yuan has more or less continually strengthened, and is now at around 6.35/1$US (around 8% stronger than its weakest level of 6.9), and, given its recent path, there is a feeling the yuan may soon reach the 6.20/1US$ level where it started 3 years ago.

March 14, 2018 update

WCO reviewed some of the parameters of US President Trump's March 8 imposition of, "for reasons of national security", tariffs on steel (25% of value of imports) and aluminum (10%) imported into the United States - the two sectors were treated separately by the US, beginning at the analysis stage, continuing all the way down to the decision stage. The national security justification is a blend of national defence needs (for weapons and defence systems), and infrastructure needs, for the up-to-28 industries considered essential to the minimum operations of the US economy and government. For both aluminum and steel, worldwide over-capacity is identified as a source of the over-reliance by the US on foreign sources, especially China for the steel industry (will this worldwide over-capacity eventually disappear if the world economy continues to grow, or is there way too much in China?) Canada and Mexico have been excluded from the aluminum and steel tariffs - they are in the midst of negotiations with the US to adjust (or, maybe, to end) the North American Free Trade Agreement (NAFTA), and their steel and aluminum producers are, in many cases, part of the US production chain. The parameters and justifications for the tariffs (as well as alternative paths of flat restrictions on imports - quotas) were developed in two January 2018 documents issued by the US Department of Commerce, which figured that 80% of the US productive capacity of each industry would be employed (versus current levels of 48% for aluminum and 73% for steel) if a 7.7% tariff (on all countries) were to be imposed on aluminum imports, and 24% on steel imports. In the analysis stages for both metals, there was an alternative case with Canada and Mexico excluded from the tariffs; in these cases, the target countries were: for aluminum - China, Hong Kong, Russia, Venezuela, and Vietnam; and for steel - Brazil, South Korea, Russia, Turkey, India, Vietnam, China, Thailand, South Africa, Egypt, Malaysia and Costa Rica. Imports currently supply 90% of US aluminum demand and 34% of US steel demand, and imposing a tariff on all countries to get to the 80% goal for each industry will (forecasted) reduce this to 79% for aluminum and 22% for steel. The reports are generally silent on how long the tariffs would have to remain in place, although there is a reference to a nine month minimum necessary to restart idled aluminum capacity. Lastly, the analysis assumes that no developments outside these two sectors take place which would change the US$ exchange rates of the steel and aluminum exporters examined and therefore affect import demand, but it does incorporate the idea that a reduction in imports from imposing the tariffs will boost the level of the US$ above what it would be otherwise, offsetting the reduction in demand for steel and aluminum imports.

(World Currency Observer will next be updated on April 4, 2018. Visit Search to look at past issues of World Currency Observer (brochure edition).)