US Dollar pinned near 15 month low

The US dollar hovered at 15-month lows on Friday and was set for its worst week since November last year as markets wagered the Federal Reserve was close to the end of its rate hike cycle as inflation eases.

The dollar index, which measures the US currency against six major rivals, fell 0.114% to 99.649, having touched a fresh 15-month low of 99.574 earlier in the session. The index is down 2.5% for the week, its worst weekly run in eight months.

Investors have been betting on a turn in the dollar for months, with short positions more than doubling over the month to July 7, according to data from Commodity Futures Trading Commission, although they remain far off the levels in 2021.

US producer prices barely rose in June and the annual increase in producer inflation was the smallest in nearly three years, data showed on Thursday, a day after data showed consumer prices rose modestly last month.

"Markets are generally pretty pleasant with the lower inflation data, because lower inflation together with the still resilient labour market supports the narrative of a soft landing in the US economy," said Carol Kong, currency strategist at Commonwealth Bank of Australia in Sydney.

"But we still maintain our view that the US will enter a recession later this year because of the impact of past and potentially future interest rate hikes."

Markets are still pricing in a 92% chance of a 25 basis point hike from the Fed later this month, CME FedWatch tool showed, but no more for the rest of the year.

Data on Thursday also showed that the number of Americans filing new claims for unemployment benefits unexpectedly fell last week, indicating that the labour market remains tight even as job growth is slowing.

Fed officials remain cautious, with Federal Reserve Governor Christopher Waller saying he's not ready to call an all clear on US inflation and favours more rate rises this year.

Shane Oliver, head of investment strategy at AMP Capital, said the Fed is still likely to hike another 25 bps this month on concerns that services inflation remain too high and worries that stopping too early when the labour market is still tight could see inflation reignite.

"But that may be it. US inflation also led inflation in other countries on the way up so its decline augurs well for other countries".

 

 

World leading currencies out of sync

Leading global currencies are rarely on different paths. Yet Japan's yen and China's yuan are slumping against the US dollar, while in Europe the euro is outperforming and sterling is on a tear, says a Reuters report.

"We've got a one in a 100 years pandemic and once in 75 years war and a once in 25 years energy crisis all thrown into the mix together," said SocGen's Juckes. "You’ve got to be 120 years old to have any understanding of this."

With economic and monetary policy outlooks varying, currency moves are increasingly out of sync with each other. This is making the US$7.5 trillion a day global FX market - operating in the aftermath of COVID-19 and the face of war in Ukraine and an energy crisis - more volatile and more unpredictable.

"It used to be the case that if you got the direction of euro/dollar right, you had a good chance of getting everything else right, but now it's a bit harder," said Nomura's G10 FX strategist Jordan Rochester.

The differences between currencies are widening.

Last year alone, the euro fell to a 20-year low versus the US dollar, sterling hit its lowest on record and the yen its weakest in 32 years, as the greenback soared broadly on sharp increases in US interest rates to curb inflation that other major central banks lagged.

The Bank of Japan has dashed expectations that a change to its ultra-dovish monetary policy would come early in 2023, sending the Japanese yen down 9% so far this year, on top of a 12% decline in 2022. That has raised the chance of intervention to stem weakness.

More pain is also anticipated for the yuan, trading near seven-month lows, as well as smaller Asian currencies.

Meanwhile the euro is up 2.5% this month against the US dollar and expected to rise further given a hawkish European Central Bank - and sterling has meanwhile risen over 5% so far in 2023, leaving it set for its biggest annual gain since 2017.

Rochester said Nomura forecast the euro moving to US$1.12 over coming months, implying a further 2% gain from US$1.095 now, and expected the yuan to weaken to 7.30 per dollar versus 7.2 now.

The yuan has slid almost 5% so far this year, hurt by a weak economy and a wide interest-rate gap with the United States.

This week Chinese authorities set a stronger than expected trading band for the currency, a sign that Beijing is increasingly uncomfortable with its quickening slide.

Lee Hardman, senior FX strategist at MUFG, said the dollar's rebound against Asian currencies reflected a reversal of the trades put in place late last year with the post lockdown reopening of China's economy, as pessimism about the growth outlook there grew.

Elsewhere the dollar is not performing as well. It's continuing to weaken against some European currencies and also Latin American currencies.

Hardman said that, as market volatility slows compared to recent years, investors were focusing more on carry trades, exploiting the variances in interest rates and monetary cycles between different central banks.

Kit Juckes, head of FX strategy at Societe Generale, said the focus on monetary policy differences was also a result of uncertainties elsewhere.

"What strikes me at the moment about FX markets is they are more short-term interest rate sensitive than I can remember them being.

"Because we are so uncertain about so many things in this most unusual of economic cycles, we're just going to focus on what the next central bank policy move is."

This is not good news for the yen, near seven-month lows against the US dollar and 15-year lows versus the euro, as the Bank of Japan holds fast to its ultra-loose monetary policy.

Of course given what the world has endured in the past few years, it is maybe not surprising that currency markets have gone a little strange.

 

What is the fate of US dollar?

The share of US dollar reserves held in central banks fell to 59% –its lowest level in 25 years – during the fourth quarter of 2020, according to the IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) survey. Some analysts say this partly reflects the declining role of the US dollar in the global economy.

Economic analysts expect that the US dollar’s share of global reserves will continue to fall as emerging market and developing economy central banks seek further diversification of the currency composition of their reserves. A few countries, such as Russia, have already announced their intention to do so.

On July 01, 1944, as the Second World War raged in Europe and the Pacific, delegates from 44 countries met at the secluded Mount Washington Hotel in Bretton Woods, New Hampshire.

This gave birth to ‘Bretton Woods Agreement’ to create a new world order in the post-World War II era. The agreement instilled the dollar as the de facto global currency.

Under the agreement gold was the basis for the US dollar and other currencies were pegged to the US dollar value. By 1971, former US President Richard Nixon ended the dollar’s convertibility to gold as US balance of payments deficits led to foreign-held dollars exceeding the US gold stock, implying that the US could not fulfill its obligation to redeem dollars for gold any longer.

Although the Bretton Woods was short-lived, the dollar standard remained as the currency for international trade and the price of the commodity that made the global wheels run, price of crude oil was fixed in dollars.

Today the dollar reigns supreme. The world’s biggest economy can print greenbacks at will to save itself from budget deficits, can lower or hike federal reserve interest rates to control the price of global crude and other commodities, can manipulate interest rates to pressure emerging and poor economies that hold their foreign reserves in the Greenback.

Recent US Federal Reserve’s historic interest rate rises raised indebtedness of emerging economies. The Association of Southeast Asian Nations (ASEAN) members are exploring how to promote the use of local currencies in their bilateral trade.

According to the IMF the greenback’s share of global foreign-exchange reserves has extended a two-decade decline, but it’s still used more than all other currencies combined.

The dollar continues to play the role of number one global currency as the American economy has been producing a shrinking share of global output over the last two decades.

Chinese trade and lending have been expanding in recent years as the renminbi (also known as yuan) use has risen.

With China’s share of global goods trade now around 15 percent, the renminbi’s reach will expand. The world’s second largest economy and the largest consumer of crude is bound to challenge the dollar’s hegemony with renminbi.

Kicking off his first visit since taking office in January 2023 to China, Brazilian President Luiz Inacio Lula de Silva attacked the US dollar hegemony in international trade, asking “why can’t we do trade based on our own currencies?”

Lula called on developing nations to work towards replacing US dollar with their own currencies in international trade. He called on BRICS (acronym for five regional economies: Brazil, Russia, India, China and South Africa) to come up with their own alternative currency for use of trade.

Prior to Lula’s visit, China and Brazil agreed to settle trades in each other’s currencies. France also recently conducted its first liquefied natural gas sale in renminbi.

The rise of the Chinese currency will take some time as only three percent of central bank reserves are in renminbi. The Society for Worldwide Interbank Financial Telecommunication (SWIFT) puts global transactions in renminbi at 2.5%, compared to 39.4% for the dollar and 35.89% for the euro.

The US economic sanctions on many nations have prompted them to use alternative currencies and even barter trade for exchange of goods.

After sanctions were applied to Russia following the Ukrainian conflict and simultaneously many Chinese companies were sanctioned by US and EU, transactions between the two neighbors shifted to renminbi.

Official data shows yuan became the most widely used currency for cross-border transactions in China overtaking the dollar for the first time.

Imports of Russian oil, piped-gas, coal and some metals from its neighbor were settled in renminbi. According to Reuters, the bilateral trade stands roughly at US$88 billion. This accelerates China’s efforts to internationalize its currency.

Iran and India established a rupee payment mechanism to eliminate dollar transactions. The state-owned United Commercial Bank (UCO) has been the primary payment settlement bank for India-Iran trade ties due to US sanctions on Iran.

The payment mechanism to import crude from Iran had provided the state-owned lender good chunk of interest-free floating fund, which helped it reduce its cost of funds.

Last year in a meeting between Iranian Foreign Minister Hossein Amir Abdollahian and his Indian counterpart Dr. Subrahmanyam Jaishankar, Abdollahian pointed out that there are existing mechanisms within the framework of international law which can help in reviving the banking and financial interaction, pointing out that Tehran has implemented such a mechanism with a dozen countries already.

A landmark agreement was signed by Jaishankar and visiting Russian deputy prime minister Denis Manturov on April 18, 2023 in New Delhi, where India agreed to adopt the Russian SPFS financial messaging system for making banking payments to Russia.

The deal also allows acceptance of Indian Ru-Pay cards and India’s Unified Payment Interface (UPI) in Russia, and the Russian MIR cards and Fast Payments Systems (FPS) in India.

In 2022 UCO Bank received the necessary approval from the regulator – the Reserve Bank of India – to open a special rupee account with Russia’s Gazprombank to facilitate trade between the two countries.

The British pound sterling, the oldest global currency still used today, anchored the global economy, until its fall in the early, mid and late 20th century.

The imminent sudden decline of the Greeenback is one of those things that can take every analyst by surprise.

The dollar’s share of global foreign exchange reserves fell from 70% in 1999 to below 59% in the last quarter of 2021, extending a two-decade decline according to IMF’s Currency Composition of Official Foreign Exchange Reserves data.

The greatest threat to dollar comes from central bank digital currencies, which can provide more efficient ways to settle transactions. The US is waking up to this danger, but should accelerate efforts on digitizing the dollar.

 

Iran to eliminate US dollar in trade with Oman

In a meeting between the governor of the Central Bank of Iran (CBI) and a senior trade delegation from Oman on Monday, the Iranian side expressed complete readiness for eliminating the United States dollar from the two countries’ trade transactions.

Speaking at the meeting, CBI Governor Mohammadreza Farzin, who is also the head of the Iran-Oman Joint Economic Committee, said the strategic policy of the Central Bank of Iran is to cut ties with the US dollar in foreign exchange and trade, the CBI portal reported.

“We have sound economic and political reasons for this strategy, because, on one hand, the US uses the dollar as a political tool, and on the other hand, other currencies, especially in Asia are getting stronger against the dollar,” Farzin explained.

Referring to the complete readiness of the CBI to reduce and eliminate dollar exchanges from the cycle of commercial and economic transactions between Iran and Oman the official said, “The grounds for conducting economic and commercial transactions based on the national currencies of the two countries are fully prepared.”

Referring to the positive negotiations between Iran and Oman last year regarding the development of monetary and banking relations along with trade relations between the two countries Frazin stated, “Iran is ready for international methods like clearinghouses, multilateral monetary agreements and bilateral monetary agreements in trade transactions with Oman.”

The CBI governor further mentioned the expansion of trade relations between Iran and Oman in the previous Iranian calendar year (ended on March 20) and said, “The trade between the two countries grew by 40% in the past year and reached US$1.8 billion.”

He further emphasized the necessity of using joint credit cards between the monetary and banking networks of Iran and Oman in order to facilitate the commercial relations and economic activities of the two countries’ businessmen and stated: “The negotiations in this regard have also been carried out with the Central Bank of Oman and Iran is ready to put the use of joint credit cards on the agenda as soon as possible.”

Iraq to allow trade with China in yuan

The central bank of Iraq said on Wednesday it planned to allow trade from China to be settled directly in yuan for the first time, in an attempt to improve access to foreign currency.

The central bank has been taking urgent steps to compensate for a dollar shortage in local markets, which prompted the cabinet to approve a currency revaluation earlier this month.

"It is the first time imports would be financed from China in yuan, as Iraqi imports from China have been financed in US dollars only," the government's economic adviser, Mudhir Salih, told Reuters on Wednesday.

The move is the latest sign of the yuan's growing role on the international stage as China gradually opens up its financial markets and some countries look to diversify their currency exposures.

The central bank could, as part of its plan, boost the balances of Iraqi banks that have accounts with Chinese banks in yuan, it said in a statement.

Another option would be to boost local banks' balances via the central bank's accounts with JP Morgan and Development Bank of Singapore (DBS), it added.

The first option would depend on the central bank's yuan reserves, while the other would use the bank's US dollar reserves at JP Morgan and DBS. The two banks would convert the dollars to yuan and pay the final beneficiary in China, Salih explained.