Forex
Analysis-Dollar drought haunts frontier economies
© Reuters. Workers pick green tea at a plantation in Githunguri, Kiambu County, Kenya June 8, 2023. REUTERS/Monicah Mwangi
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By Duncan Miriri and Marc Jones
NAIROBI/LONDON (Reuters) – As Pakistan spiralled into crisis this year, Wilson Muthaura pressed its government to put the tea Kenya’s KTDA co-operative produces 3,400 miles away on a list of essentials that would grant importers access to precious U.S. dollars.
His urgent lobbying reflects anxiety about a scarcity of dollars – the lifeblood of global trade – across emerging market and developing economies (EMDEs) that is impeding commerce and piling pressure on local currencies and sovereign debtors.
The World Bank estimates that one in four EMDEs have effectively lost access to international bond markets, a key source of hard currency needed to pay for oil and commodities like food.
It has halved growth forecasts for some economies hurt by the credit squeeze, the product of a global flight to safety as interest rates rose to combat inflation that surged last year when economies reopened after COVID and Russia invaded Ukraine.
Affected countries are also likely to see foreign direct investment being curbed, said Charlie Robertson, head of macro strategy at FIM Partners in London.
Without dollars from KTDA’s customers in Pakistan, its biggest market, the co-op that produces 60% of Kenya’s tea, would have struggled to pay its own bills.
“We were actually hit,” Muthaura said, explaining that KTDA had to rent extra warehouse space after sales slumped. Kenyan shipments of tea – its major export – have fallen by a fifth over the last year, according to the local regulator.
While customers usually pay up front and in dollars, “we had to resort to letters of credit with those buyers from Pakistan”, said Muthaura.
His efforts in Islamabad paid off, but KTDA is seeing similar strains emerging in Egypt, its second-biggest market, where three steep currency devaluations have raised worries about Cairo’s ability to service dollar debt.
The spike in global interest rates has already tipped Sri Lanka and Ghana into defaulting. Tunisia is teetering. Nigeria could soon be spending half or more of government revenues on interest payments. Even Kenya itself is seen at risk.
“Frontier economies are suffering from surging import bills exacerbated by a tightening of global financial conditions and a general flight to safety,” said David Willacy, a foreign exchange trader at StoneX in London.
BLACK MARKET
Although the dollar’s share as a global reserve currency has dropped to 59% from 70% over a decade, it continues to dominate global trade.
And because it is widely accepted and broadly holds its value, it remains strongly favoured among ordinary citizens in developing countries.
The emergence of parallel exchange rates or an unofficial market to buy dollars and other major currencies is often an early sign a country is running into problems.
“If I want dollars, I have to buy on the black market, which is expensive,” said Arouluwa Ojo, a student in Nigeria’s capital Lagos taking online lessons with a British university.
Africa’s biggest economy is a major oil exporter that sells its crude in dollars. But because it lacks refinery capacity, it has to import fuels, so hard currency is tight.
Nigeria has long had a web of multiple exchange rates which it is now trying to untangle, having also devalued its naira currency again last week.
Argentina’s recurring crises mean it has had parallel exchange rates for years, while in Cuba and Venezuela a mix of deep economic problems and U.S. sanctions mean dollars or euros are often needed to buy goods from medicines to meat.
With Cuba’s big foreign exchange earner, tourism, still recovering after the pandemic, a widening gap between those with and without access to hard currency is helping drive a record exodus of migrants from the island to the United States.
RESERVES BURN
A country burning through foreign currency reserves is another widely acknowledged sign of stress.
Specialist firm Chaucer, which provides political risk insurance, estimates that 91 of 142 countries have seen their FX reserves shrink in the last 12 months, over a third by more than 10% – a trend amplified by a rising dollar.
A plunge of around 70% in Bolivia’s reserves has spawned queues at banks and currency exchange shops as some merchants stopped accepting local currency.
“It is better for our clients to come with dollars, because with bolivianos it is not going to add up,” said La Paz TV salesman Ronal Mamani. “We don’t know exactly where the exchange rate is.”
Countries like Sri Lanka, Lebanon, Pakistan, Ukraine and Turkey have imposed capital controls, while Ethiopia, its problems exacerbated by civil conflict, banned imports of dozens of goods, including cars, to conserve money for food and fuel.
Some countries are trying to break or circumvent the dollar’s stranglehold.
Since Western sanctions cut Russia off from the global banking system, China and India have paid for Russian oil in other currencies, while Ghana is paying for oil with gold.
Brazil’s President Luiz Inacio Lula da Silva has floated the idea of a common currency for the BRICS group of emerging economies, saying in April: “We need a currency that gives countries more calm.”
The BRICS may discuss that proposal at a Johannesburg summit in August, although it is unlikely to become a reality soon. But the group is seeking closer ties with countries like Saudi Arabia as it positions itself as a counterweight to the West.
TRADE BOTTLENECKS
Dollar shortages are nearly always tied to worsening debt problems.
Echoing the World Bank, JPMorgan (NYSE:) calculates that 21 countries with a combined $240 billion of international debt are now effectively locked out capital markets – a near record.
International Monetary Fund chief Kristalina Georgieva said recently the lender is seeing more requests for aid, adding: “The IMF becomes the source of protection.”
In Africa, where the tough conditions attached to IMF loans have made some countries wary of relying on the Fund, politicians including Kenya’s president William Ruto have also argued for a trade payments system using local currencies.
“Why are we bringing dollars in the middle of our trade?” said Ruto, blaming dollar use for trade bottlenecks.
Argentina has said it will pay for Chinese imports in yuan. But China’s capital controls – and the unrivalled depth of U.S. financial markets – mean its currency is unlikely to challenge the dollar as a global force soon.
Investing.com – The US dollar slipped lower Tuesday, heading towards a one-week low following a report that President-elect Donald Trump’s tariffs could be less aggressive, while the euro gains ahead of key inflation data.
At 04:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% lower to 107.775, after falling overnight to its weakest since Dec. 30.
Dollar remains on backfoot
The dollar has been on the backfoot since the Washington Post released a report on Monday stating that the new Trump administration was exploring plans to limit tariffs to sectors seen as critical to US national or economic security.
President-elect Donald Trump has denied the report in a post on his Truth Social platform, but the dollar has still struggled to make headway.
“The dollar’s failure to recover all its intraday losses on Monday likely indicates two factors: first, the market had been heavily favoring the dollar following a nearly continuous three-month rally; second, a view that there is no smoke without fire and that the contents of that Washington Post report sounded sensible,” said analysts at ING, in a note.
There is a lot of US economic data to digest Tuesday, including for December and the November , ahead of Friday’s release of the closely watched for further clarity on the health of the world’s largest economy.
“It is unlikely investors will want to consider actively selling the dollar ahead of Trump’s inauguration on 20 January on speculation over softer tariffs – but we could see a little more rebalancing of FX positioning and a little more dollar consolidation in the interim,” ING added.
Euro climbs ahead of inflation data
In Europe, rose 0.4% to 1.0431, climbing once more after jumping to a one-week high on Monday.
Attention turns Tuesday to the release of the latest inflation data out of the eurozone – the last data on regional prices before the European Central Bank’s next meeting on Jan. 30.
The for December is expected to have risen 2.4% in December on an annual basis, speeding up from 2.2% in November.
However, data released from Spain and Germany showed faster-than-expected pickups in inflation, while France surprised to the downside.
Investors are currently looking for the ECB to ease interest rates by around 100 basis points in the first half of 2025, and any signs that inflation is easing further would give the ECB scope to loosen policy more, weighing on the single currency.
traded 0.4% higher to 1.2569, following sharp gains overnight, despite data showing British house prices dropped unexpectedly last month for the first time since March.
Mortgage lender Halifax said fell 0.2% in December after a 1.2% rise in November, and were 3.3% higher on the year – lower than the 4.2% expected.
The held interest rates unchanged last month after consumer prices rose above target, and is expected to proceed cautiously with further rate cuts this year.
Yuan remains weak
In Asia, rose 0.1% to 7.3325, with the Chinese currency continuing to underperform, hitting its weakest level in 17 years on Monday.
While the currency did recover some ground, it remained fragile, with new US. restrictions against Chinese companies adding more pressure on the currency.
slipped slightly to 157.56, after earlier hitting its highest level in nearly six months.
Investing.com– Most Asian currencies moved in a tight range on Tuesday as traders gauged the potential for less strict trade tariffs under incoming U.S. President Donald Trump, while the dollar steadied from some overnight losses.
The Chinese yuan continued to severely lag its peers after its onshore pair hit its weakest level in 17 years on Monday. While the currency did recover some ground, it remained fragile, with new U.S. restrictions against Chinese companies adding more pressure on the currency.
The dollar also steadied after recouping a bulk of its overnight losses, as a recent report sparked increased speculation over just what Trump’s tariff plans will entail.
The Japanese yen’s pair rose 0.4% and hit its highest level in nearly six months, while the Australian dollar’s rose 0.2%. Australian data for November is due on Wednesday.
The South Korean won’s pair fell slightly, while the Indian rupee’s pair steadied after recovering sharply from record highs above 86 rupees.
Dollar steadies above 1-week low amid tariff speculation
The and rose slightly in Asian trade, recovering from a one-week low hit on Monday.
The greenback recouped a bulk of its Monday losses after Trump denied a Washington Post report that his administration will impose less strict trade tariffs than initially promised.
Trump- who is set to take office in less than two weeks- has vowed to impose steep import tariffs against China and other major economies, raising concerns over a renewed global trade war.
The prospect of more tariffs was a key driver of the dollar’s recent rally, as was growing confidence that the Federal Reserve will cut interest rates at a slower pace in 2025. Hawkish comments from Fed officials furthered this notion over the weekend.
Focus this week is now on key data for December, due on Friday, for more cues on the U.S. economy and labor market.
Chinese yuan fragile amid US trade jitters
The Chinese yuan was the worst-performing Asian currency this week, having touched its weakest level in 17 years on Monday.
The yuan’s onshore pair rose 0.3% on Tuesday, with the Chinese currency remaining fragile in the prospect of more U.S. trade headwinds.
The U.S. on Tuesday added technology giants Tencent Holdings Ltd (HK:) and Contemporary Amperex Technology (SZ:) to a blacklist of companies with ties to the Chinese military, threatening to further strain ties between the world’s largest economies.
Beijing is expected to dole out even more stimulus measures in the face of a renewed trade war with the U.S.
Focus this week is on , due on Thursday, for more cues on Asia’s biggest economy, as it struggles to shore up growth.
By Chuck Mikolajczak
NEW YORK (Reuters) -The U.S. dollar was lower on Monday in choppy trading after conflicting reports about how aggressive President-elect Donald Trump’s tariff plans could be when he takes office.
The dollar dropped as much as 1.07% on the session against a basket of major currencies after the Washington Post reported that Trump’s aides were exploring plans that would apply tariffs to every country – but only on sectors seen as critical to U.S. national or economic security, easing concerns about harsher and wider levies.
The dollar then sharply pared declines after Trump denied the report in a post on his Truth Social platform.
“The reality here is that Trump’s Truth Social views are going to drive FX volatility for a while and (Monday) morning’s reaction is indicative of the underlying dynamics,” said Karl Schamotta, chief market strategist at Corpay in Toronto.
“The market consensus is that Trump’s bark will be worse than his bite, and any news that confirms that concept is fuel for rallying in risk assets and for a decline in the dollar and Treasury yields, but the reality here is that the downside risks remain and there’s no clear endpoint for that,” Schamotta added.
The , which measures the greenback against a basket of currencies, fell 0.64% to 108.26, with the euro up 0.76% at $1.0386. The dollar was on pace for its biggest daily percentage drop since Nov. 27 with the euro poised for its biggest daily gain since Aug. 2.
The dollar index had reached a two-year high of 109.54 last week en route to its fifth straight weekly gain, as the resilient economy, the potential for higher inflation from tariffs and a slower pace of rate cuts from the Federal Reserve have buttressed the greenback.
The strengthened 0.16% against the greenback to 7.348 per dollar. The dollar reached a 26-month high against the currency last week as China is seen as one of Trump’s major tariff targets.
Also helping the dollar pare declines were comments from Fed Governor Lisa Cook, who said the Fed can afford to be cautious with any further rate cuts given an economy that is on solid footing and inflation that has been stickier than expected.
Various Fed policymakers are scheduled to speak this week, and are likely to echo recent comments from other Fed officials that there remains a need to combat the stubborn levels of inflation.
The euro, which hit its lowest level since November 2022 last week, strengthened after annual German inflation rose more than forecast in December, according to preliminary data.
“There’s a window there for potentially 2%, 3% or 4% correction in the dollar index that could unfold in the next while, but we’d need either a stronger sense that either the European economy’s doing a bit better, so we see a further pick up in European interest rates, or some further moderation in expectations regarding tariffs to drive that,” said Shaun Osborne, chief FX strategist at Scotiabank (TSX:) in Toronto.
U.S. economic data showed new orders for U.S.-manufactured goods fell in November while business spending on equipment appeared to have slowed in the fourth quarter.
Against the Japanese yen, the dollar firmed 0.17% to 157.53 while sterling strengthened 0.72% to $1.251.
Investors will gauge a string of data on the U.S. labor market this week, culminating in Friday’s key government payrolls report.
The Canadian dollar strengthened 0.74% versus the greenback to C$1.43 per dollar after Canadian Prime Minister Justin Trudeau said he would step down as leader of the ruling Liberals in the coming month.
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