US Dollar’s share in central-bank reserves has declined, as per IMF data
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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Share of the Euro share in reserves also fell slightly to 19.6% from 19.7%, while the participation of the Japanese yen rose to 5.5% from 5.3%.
The US dollar’s share in global central-bank reserves dropped in the three months to the end of September, while holdings of the Japanese yen rose, International Monetary Fund data showed Friday.
The greenback accounted for 59.2% of globally allocated foreign-exchange reserves in the third quarter, down from a revised 59.4% in the previous three months, according to IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) data. That’s the lowest since the fourth quarter of last year.
Share of the Euro share in reserves also fell slightly to 19.6% from 19.7%, while the participation of the Japanese yen rose to 5.5% from 5.3%.
The shares of the Chinese yuan, the British pound, the Australian and Canadian dollars and the Swiss franc were little changed. A group of “other currencies” grew to 3.9% of reserves from 3.6% in the previous quarter.
While the US dollar has been the reserve currency of choice for most of the world’s central banks due to its depth and stability in global markets, it has been gradually losing dominance since the start of the millennium, when its share was above 70%.
The dollar’s supremacy has helped the US keep a lid on funding costs and run budget deficits, as trading partners put their dollars in US government bonds. It also supports American companies because the widespread use of dollars in global trade, such as for oil and commodities, often makes it cheaper for US multinationals to borrow.
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The worst performing currency of Asia is set for another tough year
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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BMI expects the currency will fall to 350 Pakistani rupees by the end of next year, while Karachi-based brokerage Topline Securities Ltd. sees it dropping to 324 Pakistani rupees.
The Pakistani rupee is set to end the year as Asia’s worst-performing currency and the losses are seen extending into 2024.
The currency has fallen about 20% against the US dollar this year and analysts say its troubles are far from over. BMI expects the currency will fall to 350 Pakistani rupees by the end of next year, while Karachi-based brokerage Topline Securities Ltd. sees it dropping to 324 Pakistani rupees. It closed at 285.64 Pakistani rupees on Monday.
“This looks like a currency that is set to adjust downwards,” said John Ashbourne, global economist at BMI in London, a Fitch Solutions company, citing Pakistan’s high inflation and trade deficit among the factors putting pressure on the rupee.
A dollar shortage may also lead to parallel currency markets that emerged last year after the central bank restricted access to foreign currency to preserve dwindling reserves. As the rupee slumped to a record low in September, the government intensified a clampdown on illegal buying and selling of dollar at a premium to the exchange rate. The sharp gains that followed appear short-lived.
“It’ll be very hard in the long term to convince people to use the official rate if parallel markets give more value for a dollar,” said Ashbourne. “The authorities can sort of push against the tide for a certain amount of time, but they aren’t able to do that sustainably.”
Goldman Sachs Group Inc. warned the market will continue to require a premium for the rupee given soaring interest costs and only short-term arrangements with lenders to support the external balance.
As the nation heads for national polls in February, Topline Securities expects the new government to sign the long-term program with the IMF next year, which could provide relief to the currency.
“Pakistan’s external account vulnerabilities can only be addressed effectively through a new and bigger IMF program,” its analysts wrote in a note this month.
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Federal Reserve, geopolitics threatens US Dollar’s seasonal year-end slump
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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The Bloomberg Dollar Spot Index has slumped every December for the past six straight years, with an average drop of about 1.4%, with its weakness starting in November four times. The US Federal Reserve is expected to announce the monetary policy on November 1.
A trend of year-end weakness in the greenback may fail to rescue dollar bears, given the current economic and geopolitical uncertainties in the global market.
Holiday trade flows, a seasonal appetite for risk and book-closing into year-end has traditionally pressured the US currency, but the accumulated effects of Federal Reserve policy and conflict in the Middle East this year may weaken the reliability of this trend, according to market watchers.
The Bloomberg Dollar Spot Index has slumped every December for the past six straight years, with an average drop of about 1.4%, with its weakness starting in November four times. A basket of Asian currencies against the dollar gained about 1.2% on average in both November and December.
“Real rate spreads are, relative to the last five years, favoring the dollar a lot more this time around so you already have the page set for dollar bears to be somewhat weaker in the knees,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “Clearly the elephant in the room is we’ve got unprecedented policy tightening that’s come through,” and then “you’ve got geopolitics thrown into the mix.”
Strong US economic data has persisted in recent months and the Fed continues to debate the possibility of hiking rates again this year, a move that would likely benefit the greenback. The market is pricing in just about a 20% chance of a hike by year-end, but the 10-year Treasury yield is not far from the psychological 5% level after reaching its highest since 2007 last week.
The dollar has benefited from the underlying economic trend and surge in yields, confounding a slew of bets against the currency at the start of the year. The Bloomberg gauge has climbed over 2% in 2023, while the Asian dollar index has slumped almost 5%.
Some strategists see Asia’s currencies getting a boost should China’s recovery finally gain traction. Beijing announced a 1 trillion yuan ($137 billion) boost in economic aid this week. The currencies are also heavily dependent on the path of US yields, against which the potential returns on regional assets are often compared.
“We’ve generally seen a broad trend of weakness across Asia,” said Mitul Kotecha, head of FX and EM Macro Strategy, Asia at Barclays. “But I think going into the end of the year, things may look a little bit better in some senses because we’ve had some pullback in US yields, we’ve had the dollar looking like it’s facing a little bit more resistance and data in China has shown some improvement.”
For Mizuho’s Varathan, with so many external factors weighing on the dollar, it’s hard to judge whether history will be a guide this year.
“Going into the year-end, one must be careful about the degree to which you bet against the dollar,” he said. “We should be prepared for a very unseasonable year.”
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Borrowing costs on foreign loans to get costlier as global bond yields rise
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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India’s benchmark bond yield has hovered around 7.3% for the last few days whereas the US yield crossed 5% for the first time since 2007. That has resulted shrinking the spread between the two notes to 237 basis points (bps), levels last seen in May 2006.
With the yield on US-10-year bond surpassing the psychological 5% mark, domestic companies that opt for foreign currency loans are likely to see higher debt servicing costs going forward.
The strengthening dollar and surging crude oil prices add fuel to the fire. While the rupee has depreciated 1.6% against the US dollar over the past three months, oil prices have surged 13.2% during the same period.
While foreign-currency-denominated borrowings normally tend to be cheaper compared to local currency loans, the narrowing spread between the US and Indian bond yields will bring down cost advantage for many of them.
For instance, the finance cost as a percentage of total debt for BSE500 companies stood at 7.7% at the end of FY23, against 6.6% for companies with some overseas borrowings on their books.
The gross borrowings for BSE500 companies (excluding banks and financials) increased 11% year-on-year to ₹33.04 lakh crore in FY23, data sourced from Ace Equity database shows. Of them, nearly 70 companies had foreign loans on their books, totalling ₹4.4 lakh crore. Additionally, the foreign loans of these 70 companies account for 22.2% of their combined borrowings, which stood at ₹19.6 lakh crore as of March 2023.
The companies with the highest foreign loans in absolute terms include IOCL, ONGC, TATA Motors, NTPC, and Adani Ports & SEZ, among others. While the foreign currency loans account for more than 80% of Jubilant Pharmova and Oil India’s total borrowings in FY23, other companies like Adani Ports and SEZ, Glenmark Pharmaceuticals, and UPL also have borrowed more than 60% from abroad as of March 2023.
Source: Ace Equity
India’s benchmark bond yield has hovered around 7.3% for the past few days whereas the US yield crossed 5% for the first time since 2007. That has resulted in shrinking the spread between the two notes to 237 basis points (bps), levels last seen in May 2006.
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US Dollar rises as traders seek haven assets after Hamas attack in Israel
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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A Bloomberg gauge of the US currency has advanced 2.1% this year, heading for a third annual gain. That would be the longest run since 2016. The gauge rose 0.2% in early Asia trading.
The US dollar strengthened against most of its major peers from the Asian open as currency traders got their first chance to react to a shock attack by Hamas within Israel.
The greenback — seen as a haven in times of trouble — advanced at least 0.2% versus the euro and pound, while risk currencies such as the Aussie and kiwi weakened. Oil jumped more than 3%, adding to concern around elevated inflation and adding to overall bearish sentiment.
Instability in the Middle East has the potential to add another leg to the US currency’s already stellar performance in recent months. That rally has put pressure on the yen, prompting talk of possible intervention, and reignited discussion in Europe about whether the euro may once again fall to parity.
“The path of least resistance over the very short term is dollar strength on lower risk appetite,” said Jason Wong, a currency strategist at Bank of New Zealand in Wellington. But given the scope of the rally in the dollar, “there’s a reasonable chance it fizzles out relatively quickly,” he said.
A Bloomberg gauge of the US currency has advanced 2.1% this year, heading for a third annual gain. That would be the longest run since 2016. The gauge rose 0.2% in early Asia trading.
Fallout from the attacks reverberated through Middle East markets on Sunday, sending stocks sliding and setting the tone for what’s likely to be a volatile start of the week. Israel’s benchmark TA-35 stock index posted its biggest loss in more than three years, sliding 6.5%. Elsewhere, the Mexico peso, often seen as a proxy for emerging markets and carry-trade strategies, weakened nearly 1% against the dollar.
The US dollar has also benefited from the Federal Reserve’s aggressive interest-rate increases as well as resilience in the US economy. Still, a holiday for the US bond market on Monday may mute short-term gains for the dollar if investors are seeking it to invest their holdings of the currency in Treasuries. Cash trading will reopen on Tuesday.
The “dollar bid holds and the confusion over growth and inflation continues,” Bob Savage, head of markets strategy at insights at BNY Mellon Capital Markets, wrote in a note. “We are more likely to see an escalation of conflict than a resolution both at home and abroad, in markets and in economics, in monetary and fiscal policy.”
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Taliban controls the world’s best performing currency this quarter
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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The currency controls, cash inflows and other remittances have helped the afghani climb around 9 percent this quarter, outpacing the likes of the Colombian peso’s 3 percent gain, data compiled by Bloomberg show.
Billions of dollars from humanitarian aid and rising trade with Asian neighbors has propelled Afghanistan’s currency to the top of global rankings this quarter — an unusual spot for a poverty-stricken country with one of the world’s worst human rights records.
The ruling Taliban, which seized power two years ago, has also unleashed a series of measures to keep the afghani in a stronghold, including banning the use of dollars and Pakistani rupees in local transactions and tightening restrictions on bringing greenbacks outside the country. It has made online trading illegal and threatened those who violate the rules with imprisonment.
The currency controls, cash inflows and other remittances have helped the afghani climb around 9 percent this quarter, outpacing the likes of the Colombian peso’s 3 percent gain, data compiled by Bloomberg show. The afghani is up about 14 percent for the year, putting it third on the global list, behind the currencies of Colombia and Sri Lanka.
Yet the paring of the currency’s losses seen after regime change also belies the dramatic upheaval that persists on the ground with Afghanistan largely cut off from the global financial system because of sanctions.
Unemployment is rampant, two thirds of households struggle to afford basic items and inflation has turned into deflation, according to a World Bank report. Planeloads of US dollars arrived almost weekly from the United Nations to support the poor, some of up to $40 million, for at least 18 months since the end of 2021.
“The hard currency controls are working, but the economic, social and political instability will render this rise in the currency as a short-term phenomenon,” said Kamran Bokhari, an expert in Middle Eastern, Central and South Asian affairs at the Washington-based New Lines Institute for Strategy & Policy.
Meanwhile, dollars being smuggled into Afghanistan from Pakistan have also given a lifeline to the Taliban in previous months. Da Afghanistan Bank, the country’s central bank, is auctioning up to $16 million almost every week to support the currency, said spokesman Hassibullah Noori.
As pressure on the currency eased, the central bank has increased the limit for dollar withdrawals to $40,000 per month for businesses from $25,000 and $600 a week for individuals from $200 two years ago. The afghani traded around 78.50 per dollar on Monday.
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US Dollar rallies to 2023 high while yields keep rising on Fed’s path
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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The Bloomberg Dollar Spot Index gained 0.4 percent during Monday’s trading session in New York, pushing it back above this year’s previous high.
The US dollar staged its biggest rally in three weeks, driving it to the strongest against its key counterparts since December, as expectations that the Federal Reserve will hold interest rates high well into next year draws cash into the US.
The Bloomberg Dollar Spot Index gained 0.4 percent during Monday’s trading session in New York, pushing it back above this year’s previous high. The yen fell to its lowest against the US currency since October, the euro slid as much as 0.7 percent to its lowest level since March, and the Swiss franc hit its weakest level since May.
The greenback’s rise, the fourth straight daily gain, was fueled by indications from the Fed last week that it plans to keep rates elevated as the surprising strength of the economy leaves inflation the central bank’s predominant concern. That’s highlighting the difference between the US and countries elsewhere around the world where growth is sputtering under the weight of tighter monetary policy.
“There is simply a lot of optimism priced into the US dollar,” Esther Reichelt, a foreign exchange strategist at Commerzbank AG in Frankfurt, said on Bloomberg Television. “This was supported by the Fed’s view, which basically said that even if we are seeing a cooling of economic dynamics, this will not slip through to the labor market.”
The dollar is being supported by the rise in Treasury yields since the Fed’s September 20 meeting, which has given investors an incentive to move money to the US. On Monday, the yield on 10- and 30-year Treasuries rose to multi-year highs, with traders recalibrating the Fed’s path after it indicated it’s unlikely to ease monetary policy next year by as much as markets had previously anticipated.
“Central banks are mostly consistent in messaging — that they’re basically at, or close to,” peak rates, said Bipan Rai, CIBC’s global head of foreign exchange strategy in Toronto. But, he said, the US economy hasn’t been affected nearly as much as other countries where mortgages with adjustable rates have squeezed households.
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Crude oil prices surge to 9-month high amid supply cuts and China’s economic recovery, expert insights
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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Crude oil prices have hit a 9 month high on expectations of additional supply cuts by major oil producers like Saudi Arabia and Russia. The prices have surged by 7 percent in the past one week alone and about 25 percent so far this year. China’s signs of economic recovery have also given a boost to crude.
Crude oil prices have hit a 9-month high on expectations of additional supply cuts by major oil producers like Saudi Arabia and Russia. The prices have surged by 7 percent in the past week alone and about 25 percent so far this year. China’s signs of economic recovery have also given a boost to crude.
Ole Hansen, head of commodity strategy at Saxo Bank, shared his insights on the current situation in an interview with CNBC-TV18. He emphasised, “The cuts from Saudi Arabia and also from Russia are certainly the main driver for the sentiment right now. Also, the demand from China is not showing any signs of peaking at this point. So, the demand outlook remains strong as well.”
China’s economic activity has long been a bellwether for the global commodity markets, and crude oil is no exception. Jonathan Barratt, chief investment officer at Probis Securities, highlighted the importance of China’s role in shaping the crude oil landscape.
He explained, “If you do see China starting to lift its game in terms of its stimulus, then that’s really going to put a bit of a shift in the demand for crude oil. And let’s look at it this way: if you just see domestic travel in China pick up by 15 to 20 percent, you are going to see a significant draw on fuel, and that’s certainly going to support prices.”
This bullish sentiment in the crude oil market comes at a time when other commodities like gold and silver are experiencing mixed fortunes. While prices of both precious metals have recently reached one-month highs, they remain under pressure due to the strengthening of the US dollar index, which has climbed back above the 104 mark.
Over the past month, gold prices have declined by approximately half a percent, and silver prices have witnessed a more substantial drop of 5 percent.
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For the S&P 500, this was the best week since June. Wall Street is, essentially, cheering for signs that the US economy is, finally, slowing down.
Wall Street index
Gains for the week ended Sep 1, 2023
Dow Jones
1.4%
Nasdaq
3.3%
S&P 500
2.5%
The US has been gripped by debilitating inflation since a few months after the pandemic. The Federal Reserve has been trying to tame it with interest rate hikes but the needle didn’t move significantly, until, it seems, now.
Consumer price inflation in the US was at 4.3 percent in July 2023, down from the peak of 5.4 percent in February 2022 but far, far away from the two percent mark US Federal Reserve has been aiming for. In the meantime, US interest rates are at their highest in 22 years, making lives tougher for both individual borrowers as well as businesses.
One of the reasons being cited for the sticky inflation is that there are more jobs in the US than there are people looking for them. And, that trend continued in August. The 187,000 jobs added in the US economy last month was more than what the market had expected.
However, the steady rise in wages, while at 4.3%, was just a tad bit softer than what the analysts had estimated. The market seemed to take this as an indication that the pricing pressure on businesses may be starting to ease.
If these numbers, the growth in jobs and wages in America, were any higher than what came through for the month of August, it would have been a sign that Jerome Powell, the chief of the American central bank, may have to hike interest rates further amidst a cost of living crisis.
“Getting inflation sustainably back down to 2 percent is expected to require a period of below-trend economic growth and some softening in labor market conditions,” Jerome Powell said at his Jackson Hole speech on August 25.
Now, after the latest data, the CME Group’s FedWatch tool showed traders expect a 93% chance of that interest rates in the US may remain unchanged when the Fed officials for a review on September 19 and 20.
Earlier on August 21, Robert Sockin of Citi and Steven Englander, from Standard Chartered Bank, predicted that the US Fed may leave interest rates unchanged in the upcoming review. At he same time, the two experts emphasised the point that the US economy will have to live with high interest rates for much longer time. Watch the following interview to understand why.
But not everyone thinks that the trend of rising interest rates in the US is over. “Even though trends in inflation are moving the right direction and a broader view of the employment market would indicate wage pressures should abate, overall economic growth is above trend and inflation remains well above the Fed’s recently confirmed 2% target,” Steve Wyett, chief investment strategist at BOK Financial, told CNBC on September 1.
Why is this data important for Indian investors?
Rising interest rates in America make the US dollar more attractive and, therefore, the rupee weaker. If the rupee-dollar exchange rate weakens, it makes imports more expensive and India is a net importer of some crucial items like crude oil.
If it costs more dollars to bring crude oil into India, it will make everything else more expensive because the fuel needed to transport everything from crops to consumer goods will get dearer. India, too, is faced with biting inflation. The latest data for July showed that prices have gone beyond the tolerance level set by the Reserve Bank of India.
If this trend continues, the RBI too will have to get back to hiking rates — it’s on pause right now — and that would increase borrowing costs for businesses in India. All else remaining equal, it’s reasonable to expect some of the Wall Street cheer to reflect on the Sensex and Nifty 50 (India’s benchmark indices for stocks) when the markets reopen for trade on Monday (September 4).
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Explained | How the data from US and China may redirect dollars from India
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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US’ attempt to tame inflation and China’s efforts to revive the economy may lure foreign investors away from India.
India may be, and remain, the fastest-growing major economy and an attractive market for equity investors in the long run. But there are uncertainties that investors must consider in the near term. So far, foreign portfolio investors have pumped in $16 billion into Indian equities in 2023. However, in the next few months, there may be at least three deterrents.
Ed Yardeni, President of Yardeni Research told CNBC-TV18, “All emerging markets are facing some issues with regards to the Fed. If the Fed keeps interest rates up here, and bond yields are under some pressure to move a little higher, especially in emerging markets that is not good for emerging markets, the stock markets, including India.”
Firstly, the US Federal Reserve has hiked rates by more than 525 bps but inflation refuses to cool off. Interest rates are at their highest in 22 years. But Chairman Jerome Powell may be forced to raise the rates even further to tame a stubborn inflation at home. And, that could make the dollar more expensive and hurt emerging markets like India.
“We have tightened policy significantly over the past year. Although inflation has moved down from its peak, a welcome development, it remains too high,” Powell stated at his speech in Jackson Hole.
Secondly, economic data coming out of Chinahas been very disappointing. Be it the industrial output, retail sales or even the employment data.
The Shanghai Composite is up 0.6 percent for the year so far, but this week (until August 30), it has gained more than Nifty 50, the Indian benchmark index for equities.
In the past month, China’s central bank has cut interest rates, and this week there was a stamp duty cut on stock trades.
Any further efforts from the authorities in China, to revive the economy and the markets, will only make the country’s shares more attractive. Chinese stocks are trading at a sharp discount to their Indian peers. That could move some of the dollars looking for returns to China.
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Herald Van Der Linde, Head of Asia Equity Strategy, HSBC told CNBC-TV18, “Despite the fact that we are seeing some bad news on the macro side, the earnings numbers in China are coming through pretty good. China is going to grow fast if not marginally faster than India this year.”
In India, the monsoons — which affect everything from crop output to consumer sentiment — have been less than exciting. The country, which is already reeling from high inflation, just saw the driest August ever. But the stock index is just 3.5% short of its all-time high, which it hit on July 20. Some foreign investors may find it too expensive.
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