Dollar dominance eroding, though slowly

Dollar dominance—the outsized role of the US dollar in the world economy—has been brought into focus recently as the robustness of the US economy, tighter monetary policy and heightened geopolitical risk have contributed to a higher greenback valuation. At the same time, economic fragmentation and the potential reorganization of global economic and financial activity into separate, non-overlapping blocs could encourage some countries to use and hold other international and reserve currencies.

Recent data from the IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) point to an ongoing gradual decline in the dollar’s share of allocated foreign reserves of central banks and governments.

Strikingly, the reduced role of the US dollar over the last two decades has not been matched by increases in the shares of the other “big four” currencies—the euro, yen and pound. Rather, it has been accompanied by a rise in the share of what we have called nontraditional reserve currencies, including the Australian dollar, Canadian dollar, Chinese renminbi, South Korean won, Singaporean dollar, and the Nordic currencies. The most recent data confirm this trend.

These nontraditional reserve currencies are attractive to reserve managers because they provide diversification and relatively attractive yields, and because they have become increasingly easy to buy, sell and hold with the development of new digital financial technologies (such as automatic market-making and automated liquidity management systems).

This recent trend is all the more striking given the dollar’s strength, which indicates that private investors have moved into dollar-denominated assets. Or so it would appear from the change in relative prices.

At the same time, this observation is a reminder that exchange rate fluctuations can have an independent impact on the currency composition of central bank reserve portfolios.

Changes in the relative values of different government securities, reflecting movements in interest rates, can similarly have an impact, although this effect will tend to be smaller, insofar as major currency bond yields generally move together.

Taking a longer view, over the last two decades, the fact that the value of the US dollar has been broadly unchanged, while the US dollar’s share of global reserves has declined, indicates that central banks have indeed been shifting gradually away from the dollar.

At the same time, statistical tests do not indicate an accelerating decline in the dollar’s reserve share, contrary to claims that US financial sanctions have accelerated movement away from the greenback.

To be sure, it is possible, as some have argued, that the same countries that are seeking to move away from holding dollars for geopolitical reasons do not report information on the composition of their reserve portfolios to COFER.

It is worth noting that the 149 reporting economies make up as much as 93% of global foreign exchange reserves.

One nontraditional reserve currency gaining market share is the Chinese renminbi, whose gains match a quarter of the decline in the dollar’s share.

The Chinese government has been advancing policies on multiple fronts to promote renminbi internationalization, including the development of a cross-border payment system, the extension of swap lines, and piloting a central bank digital currency.

It is interesting to note that renminbi internationalization, at least as measured by the currency’s reserve share, shows signs of stalling out. The most recent data do not show a further increase in the renminbi’s currency share - some observers may suspect that depreciation of the renminbi exchange rate in recent quarters has disguised increases in renminbi reserve holdings. However, even adjusting for exchange rate changes confirms that the renminbi share of reserves has declined since 2022.

Some have suggested that what we have characterized as an ongoing decline in dollar holdings and rise in the reserve share of nontraditional currencies in fact reflects the behavior of a handful of large reserve holders.

Russia has geopolitical reasons to be cautious about holding dollars, while Switzerland, which accumulated reserves over the last decade, has reason to hold a large fraction of its reserves in euros, the euro area being its geographical neighbor and most important trading partner.

When analysts exclude Russia and Switzerland from the COFER aggregate, using data published by their central banks from 2007 to 2021, they find little change in the overall trend.

In fact, this movement is quite broad. A paper by the IMF in 2022, identified 46 “active diversifiers,” defined as countries with a share of foreign exchange reserves in nontraditional currencies of at least 5% at the end of 2020. These include major advanced economies and emerging markets, including most of the Group of Twenty (G20) economies. By 2023, at least three more countries (Israel, Netherlands, Seychelles) have joined this list.

IMF also found that financial sanctions, when imposed in the past, induced central banks to shift their reserve portfolios modestly away from currencies, which are at risk of being frozen and redeployed, in favor of gold, which can be warehoused in the country and thus is free of sanctions risk.

This shows that the demand for gold by central banks responded positively to global economic policy uncertainty and global geopolitical risk. These factors may lie behind the further accumulation of gold by a number of emerging market central banks. It is important to recall that gold as a share of reserves still remains historically low.

In sum, the international monetary and reserve system continues to evolve. The patterns IMF has highlighted earlier—very gradual movement away from dollar dominance, and a rising role for the nontraditional currencies of small, open, well-managed economies, enabled by new digital trading technologies—remain intact.

 

US drillers cut oil and gas rig count to lowest

The US energy firms this week cut the number of oil and natural gas rigs operating to the lowest since January 2022, reported energy services firm Baker Hughes in its closely followed report on Friday.

The oil and gas rig count, an early indicator of future output, fell by four to 590 in the week to June 14, 2024. That puts the countdown for the second week in a row.

Baker Hughes said the total rig count is down 97 rigs, or 14%, below this time last year. Oil rigs fell by four to 488 this week, also their lowest since January 2022, while gas rigs were unchanged at 98, which was the lowest since October 2021.

In Texas, the state with almost half of the country's active rigs, the total count slid by 2 to 285, the lowest number of rigs operating in the state since January 2022.

The oil and gas rig count dropped about 20% in 2023 after rising by 33% in 2022 and 67% in 2021, due to a decline in oil and gas prices, higher labor and equipment costs from soaring inflation and as companies focused on paying down debt and boosting shareholder returns instead of raising output.

The US oil futures were up about 10% so far in 2024 after dropping by 11% in 2023, while US gas futures were up about 15% so far in 2024 after plunging by 44% in 2023.

The increase in oil prices should encourage drillers to boost US crude output from a record 12.9 million barrels per day (bpd) in 2023 to 13.2 million bpd in 2024 and 13.7 million bpd in 2025, according to the latest US Energy Information Administration (EIA) outlook.

Even though gas futures were trading higher now, several producers reduced spending on drilling activities earlier in the year after prices drop to 3-1/2-year lows in February and March.

The drilling decline should cause US gas output to slide to 102.1 billion cubic feet per day (bcfd) in 2024, down from a record high of 103.8 bcfd in 2023, according to the EIA.

 

South Pars platform ready for gas extraction

Iranian Oil Minister Javad Oji said South Pars phase-13 Alpha platform was ready to start gas extraction, Shana reported. He was speaking on the sidelines of the weekly meeting of cabinet on June 11, 2024. Gas extraction from the platform will start with five to six million cubic meters per day (mcm/d) and will rise to 22 mcm/d in the future.

The platform, which was damaged heavily due to hitting by a Bahraini commercial ship, has been repaired and renovated, now ready for gas extraction, Oji said. 

“This is the second platform starting operation in the South Pars gas field during the 13th administration", the minister said, adding “The issue of launching the platform was raised today in the cabinet meeting and we invited acting president Mohammad Mokhber to take part in its opening ceremony.”

Elsewhere in his remarks he said, up to now, we have managed to put an end to burning of 11.5 million cubic meters of associated gases per day while the installed facilities are ready to increase the figure by another 4.5 million cubic meters per day.

According to him, the Changuleh oil field development plan is ready for signing the contract and implementation by domestic investors and contractors.

With regard to the development of the second phase of the Yadavaran shared oil field, we decided not to wait for foreign companies and will start executive operations for its development next week, the Minister of Petroleum concluded.

South Pars gas field, which Iran shares with Qatar in the Persian Gulf, is estimated to contain a significant amount of natural gas, accounting for about eight percent of the world’s reserves, and approximately 18 billion barrels of condensate. The field is divided into 24 standard phases.

The huge offshore field covers an area of 9,700 square kilometers, 3,700 square kilometers of which are in Iran’s territorial waters in the Persian Gulf. The remaining 6,000 square kilometers, called North Dome, are situated in Qatar’s territorial waters.

Bangladesh: Textile units suffering from financial crunch

According to a report by The Business Standard, Bangladesh’s textile sector is going through a financial crisis as banks are delaying payments amounting to Tk420 crore against letters of credit (LC), even after more than six months of maturity.

The issue has plunged 52 textile mills in a difficult situation, prompting urgent appeals for intervention from the central bank. A letter has been sent to the Bangladesh Bank governor on June 13, 2024 in this regard by the Bangladesh Textile Mills Association (BTMA).

The letter signed by Mohammad Ali Khokon, president of BTMA, cited instances where banks have failed to release payments even six months past the maturity date of an LC. The letter said, “Despite providing goods on back-to-back LCs, some banks are not settling the bills promptly.”

According to BTMA sources, after a meeting with the Bangladesh Bank governor on June 11, a list of affected mills was submitted as per his instructions, highlighting instances where banks failed to clear bills even after the maturity dates of nearly US$36 million dollars in LCs for about 52 mills.

NZ Tex Group, one of the country’s largest textile mills, faced a payment delay of around US$2 million after supplying goods.

Saleudh Zaman Khan, managing director of NZ Tex Group, told The Business Standard, “Some of our LCs against bills are already overdue with banks. LCs are supposed to mitigate risks, yet banks charge commissions without ensuring timely payments.”

He further added, “If banks cannot disburse payments on time, why issue LCs and charge commissions? I can directly supply goods by managing risks myself.”

Basically, when an exporter receives a Letter of Credit (LC) against a foreign order, they can purchase goods from the local market on credit using that LC. This process is known as a back-to-back LC.

Local raw material suppliers are supposed to receive payment from the bank within 90 to 120 days after accepting the back-to-back LC from the local buyer. This period is known as the maturity date. If this time frame is exceeded, it is considered overdue. Currently, in some cases, the maturity date has been surpassed by anywhere from one month to even over a year.

Given the situation, stakeholders have expressed concerns over potential shutdowns if the current crisis persists.

A textile mill entrepreneur, requesting anonymity, told TBS, “Production is severely affected due to a twofold increase in gas prices. Combined with unpaid payments from banks, it’s becoming increasingly difficult to pay employees’ salaries and bonuses before Eid.”

Syed Mahbubur Rahman, managing director of Mutual Trust Bank Limited, told TBS, “This problem has existed for a long time. Often, this happens because the textile millers who supply the products face delays in receiving their payments.”

“While bills from foreign buyers (typically RMG entrepreneurs) for imported raw materials are settled promptly, local textile mills often face delays in LC payments from banks and garment owners,” he added.

Noting that local textile millers are always on the back foot, he said, “Due to payment delays, their loans sometimes become classified as well.”

 

US approves mammoth annual defense bill

The House approved its version of the annual defense policy bill Friday, which includes a number of controversial culture war amendments, setting the stage for a showdown with the Democratic-controlled Senate over legislation that typically enjoys bipartisan support, reports The Hill.

The US$883.7 billion measure — known as the National Defense Authorization Act (NDAA) — were approved in a largely party-line 217-199 vote. Six Democrats voted in favor of the measure, while three Republicans opposed it.

The House edition of the legislation is all but certain to languish in the Senate where Democrats, who hold the majority, abhor many of the amendments Republicans added, including those pertaining to abortion, transgender rights and diversity, equity and inclusion (DEI) initiatives.

The Senate Armed Services Committee this week held a markup for its version of the NDAA, the text of which is not expected to be released until July, a spokesperson for the panel told The Hill.

Leaders in both chambers will then craft a compromise version of the legislation, which has been voted on and signed into law every year for the past six decades.

Top Republicans, nonetheless, touted their bill as a strong measure that will back US troops, empower the National Guard to crack down on the southern border and provide American forces with innovative technologies.

At the top of the list of culture war amendments added to the House’s NDAA was a provision spearheaded by Rep. Beth Van Duyne that seeks to block a Biden administration policy that reimburses service members for the travel costs incurred when receiving an abortion.

It zeroes in on the same Pentagon policy that Sen. Tommy Tuberville targeted through his months-long blockade on military promotions last year.

Ahead of Thursday’s votes, Democrats warned GOP leaders against loading the bill with so-called poison pills — Rep. Mikie Sherrill, a Navy veteran, argued that the conservative amendments “cheapen” the defense bill. 

The GOP strategy of embracing culture war issues in the NDAA is not new. Then-Speaker Kevin McCarthy did the same last year, relying on a united GOP as almost all Democrats opposed the bill after Republicans loaded it with similar amendments attacking Pentagon policies on abortion access, medical care for transgender service members, and DEI initiatives.

Similar to last year, Republican leaders this time around had little room for error when it came to the final vote on the NDAA. Republicans have a razor-thin majority in the House, allowing them to lose just two GOP votes on any party-line measures, assuming all lawmakers are present.

The House-passed NDAA abides by the spending caps laid out in last year’s debt limit agreement, imposing one percent increase over the fiscal 2024 defense policy bill. The legislation, however, reshuffles billions of dollars proposed by the Pentagon, increasing funds for submarines, paring down money for fighter jets and delaying the retirement of dozens of aircraft.

The bill also has a provision that would rehire service members kicked out for refusing the COVID-19 vaccine.

In addition, the House NDAA contains widely supported quality of life initiatives for service members, such as a roughly 20% pay boost for junior enlisted members and increases to housing allowances.

 

China and Iran to strengthen BRICS

This year is the first year that Iran has formally joined the BRICS mechanism, which provides a new platform for China-Iran cooperation and enriches the vision and potential of the China-Iran comprehensive strategic partnership.

BRICS Foreign Ministers' meeting was held in Nizhny Novgorod, Russia on June 10 and 11.

 Member of the Political Bureau of the CPC Central Committee and Foreign Minister Wang Yi, attended the meeting and met with Iranian Acting Foreign Minister Bagheri. Wang expressed warm congratulations for Iran’s participation in the BRICS Foreign Ministers' Meeting for the first time as a formal member.

Nowadays, the world has entered a new period of turbulence and transformation. It is undergoing major shifts, division and regrouping, leading to more uncertain, unstable and unpredictable developments. BRICS is an important force in shaping the international landscape.

BRICS' expansion has ushered in a new era for the Global South to gain strength through unity, and the appeal and attractiveness of BRICS has been continuously increasing.

In terms of scale, the BRICS countries account for nearly half of the world's population, and the BRICS has already surpassed the G7 in purchasing power parity.

In terms of economy and trade, the BRICS countries' goods trade accounts for about 20% of the world's total, but the trade volume between them only accounts for about 10% of their respective foreign trade, and there is still great potential for growth.

The BRICS New Development Bank supports nearly 100 projects, promoting the economic and social development of member countries.

In terms of international influence, the BRICS mechanism includes major emerging economies and major countries in all continents. After the expansion, the BRICS mechanism has more influence in international affairs and global governance to safeguard the common interests of developing countries.

The data released by the Iran Customs Administration (IRICA) indicated that the value of Iran’s non-oil trade with BRICS group of countries was close to US$40 billion in the 2022-2023 fiscal year, showing a 14% increase as compared to same period a year earlier.

Iran's BRICS story is inseparable from the background of China-Iran brotherhood, and will surely add bright BRICS colors to the picture of China-Iran friendship. Iran is one of the first countries to apply to join the BRICS mechanism.

In 2017, President Xi Jinping proposed the "BRICS Plus" cooperation concept and invited Iran to join. In 2022, China assumed the presidency of the BRICS and launched the expansion process. In 2023, with the support of China and other countries, Iran was accepted as a formal member of the BRICS.

Looking to the future, China and Iran have great potential for cooperation under the BRICS mechanism. Both sides should give priority to development, pool their efforts for progress, deepen pragmatic cooperation, enhance cultural exchanges, and promote the upgrading of China-Iran friendly relations in all fields.

Both sides should safeguard universal security, work together to meet challenges, stick to independence, objectivity and fairness, promote international consensus for peace, and provide new impetus for the political settlement of hot issues.

Both sides should uphold fairness and justice, improve global governance, continue to hold high the banner of multilateralism, work closely together in the BRICS mechanism, take the lead in upholding the UN-centered international system, and promote the realization of an equal and orderly multipolar world.

Thanks to the long-standing traditional friendship and high political mutual trust between the two sides, China-Iran relations have maintained healthy and stable development. China is willing to strengthen strategic coordination with Iran, adding BRICS color to the beautiful picture of China-Iran friendship.

 

Pakistan Stock Exchange Records Highest Gain

During this past week the market lost ground in the first two days amidst rumors about potential increases in the Capital Gains Tax (CGT) due to which KSE100 index stayed bearish and the index hit 72,589 level before showing signs of recovery on Wednesday. Market recovered swiftly after the announcement of Federal Budget for FY25. The taxation measures introduced in the budget weren't as adverse as originally anticipated. On Thursday the index gained 3,410 points, most in a single day and closed at 76,706 level on Friday reaching the highest ever closing, with a gain of 2,952 points, up 4%WoW.

Despite initial jitters over proposed tax changes, the market recovered, reflecting investors’ confidence amidst pre-budget uncertainty. The week also saw the State Bank of Pakistan (SBP) announcing a first token rate-cut of 150 bps, adding further to the positivity.

As inflation outlook eases, the cut-off yields in the latest T-Bills auction dropped.

Overall, average trading volumes decreased by 3.8%WoW to 409.6 million shares as compared to 423.3 million shares a week ago.

On the currency front, PPR depreciated by 0.11%WoW to close at 278.51/US$.

Other major news of the week included: 1) RPK9 billion approved for clearing OMCs’ PDCs, 2) ECC allowed conditional export of 0.15 million tons sugar, 3) In FY25 Budget government announced to raise tax to GDP ratio to 13%, 3) government also announced to float US$1 billion bonds and obtain US$4 billion loans from the foreign banks, 4) FY25 Budget aimed raising PKR3.8 trillion new taxes and , 5) World Bank projected Pakistan’s GDP growth at 2.3%.

According to AKD Securities Commercial Banks, Pharmaceuticals, Oil & Gas Exploration Companies, Oil & Gas marketing companies and Paper & Board were amongst the top performing sectors, while laggards included Textile composite, Woollen, Leasing companies, Food & Personal Care Products and Textile Spinning.

Major net selling was recorded by Individuals with a net sell of US$8.9 million. Mutual funds absorbed most of the selling with a net buy of US$11.1 million.

Top performing scrips of the week were: BAFL, MCB, NCPL, UBL and KOHC, while laggards included: ILP, PTC, YOUW, COLG and 5) PGLC.

The post-budget market has attained some certainty, particularly in sectors that benefitted from budgetary measures. With the start of monetary easing, optimism is expected to rise, particularly in cyclical sectors.

Furthermore, the approval of the budget paves the way for the upcoming IMF program, which will likely become a significant market catalyst going forward.