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.
By Karen Brettell
NEW YORK (Reuters) -The dollar dipped on Friday but was on track for its strongest weekly performance in a month on expectations that the U.S. economy will continue to outperform its peers globally this year and that U.S. interest rates will stay relatively higher.
A still solid labor market and stubbornly high inflation have lifted Treasury yields in recent weeks and boosted demand for the U.S. currency.
New policies under the incoming Donald Trump administration, including business deregulation, tax cuts, curbs on illegal immigration and tariffs, are also expected to boost growth and add to price pressures.
The was last down 0.28% on the day at 108.91, after hitting a two-year high of 109.54 on Thursday. It is on track for a weekly gain of 0.85%.
Despite recent dollar gains there remains considerable uncertainty over when policies will be introduced by the new U.S. government, and what their ultimate impact will be. That could pause the dollar rally in the near-term.
“We’re likely to see a bit of a dollar pullback as the administration comes in because all these proposed tariffs – they’re going to take some time to implement and we don’t actually know if all of these proposals are going to be implemented or not,” said Helen Given, FX trader at Monex USA in Washington.
“As we move through the second half of this calendar year I think we’re going to see some more dollar strength,” Given said.
The dollar briefly pared losses after data on Friday showed that U.S. manufacturing moved closer to recovery in December, with production rebounding and new orders rising further.
The euro faces a weaker growth outlook and may be hurt by U.S. tariffs, with the European Central Bank expected to cut rates further than the Federal Reserve this year.
Traders are pricing in 100 basis points rate cuts by the ECB by year-end, and only a less than certain chance of 50 basis points of cuts by the Fed.
Uncertainties including the French budget battle and German elections are also weighing on the single currency.
The euro was last up 0.39% at $1.0305 but was headed for a 1.22% weekly decline, its worst since early-November.
Sterling gained 0.41% to $1.2431. It was on track to lose roughly 1.15% for the week, the most since early November.
The dollar slid 0.26% to 157.11 Japanese yen, holding just below a five-month high of 158.09, reached in December.
The Japanese currency has suffered from the wide interest rate differential between the U.S. and Japan, with the Bank of Japan’s caution over further rate increases spelling more pain for the yen.
China’s hit its weakest level in over a year at 7.3199 per dollar, as falling yields and expectations of more domestic rate cuts continued to weigh on the currency.
In cryptocurrencies bitcoin gained 1.59% to $98,658.
Investing.com– Most Asian currencies moved in a flat-to-low range on Friday, pressured by strength in the dollar as traders positioned for a slower pace of interest rate cuts by the Federal Reserve in 2025.
Regional trading volumes remained slim on account of the new year holidays, with Japanese markets remaining closed until next week.
The Chinese yuan was among the worst performers in Asia, hitting its weakest level in nearly 16 months as a Financial Times report said the People’s Bank of China will cut interest rates further in 2025.
The yuan, along with its regional peers, was also nursing steep losses in 2024, as the dollar benefited from a hawkish Fed and the prospect of protectionist policies under incoming President Donald Trump.
Dollar at 2-yr high as rate cut bets ease
The and fell 0.1% in Asian trade after racing to a fresh two-year high on Thursday.
The greenback’s latest round of gains came after weekly data read stronger than expected, indicating that the labor market remained strong. A strong labor market gives the Fed more headroom in considering future monetary easing.
The central bank signaled during its December meeting that it will cut interest rates at a substantially slower pace in 2025, citing concerns over sticky inflation.
Resilience in the U.S. economy also gives the Fed less impetus to cut rates, although the Atlanta Fed’s was revised lower for the fourth quarter on Thursday.
Chinese yuan weakens as PBOC flags more rate cuts
The Chinese yuan was among the worst performers in Asia, with the pair rising nearly 0.4% to 7.3275 yuan- its highest level since September 2023.
The FT reported that the PBOC will cut interest rates further in 2025, as the central bank pivots to a more conventional monetary policy structure under a singular benchmark interest rate.
The monetary policy reform comes as a slew of liquidity measures largely failed to stimulate China’s economy over the past two years. This is expected to elicit more monetary easing by the PBOC, which bodes poorly for the yuan.
The yuan was already nursing losses for the week, as purchasing managers index data released earlier showed slowing growth in China’s manufacturing sector.
Broader Asian currencies moved in a tight range, but were nursing steep losses in recent months as traders positioned for a slower pace of U.S. rate cuts in 2025.
The Japanese yen’s pair fell 0.1% after hitting an over five-month high in late-December.
The Australian dollar’s pair rose 0.2%, while the South Korean won’s pair fell 0.2% amid repeated assurances of financial stability from the government.
The Indian rupee’s pair steadied at 85.8 rupees after hitting a record high above 86 rupees earlier this week.
By Karen Brettell
NEW YORK (Reuters) -The U.S. dollar jumped to a two-year high on Thursday in the first day of 2025 trading, building on last year’s strong gains on expectations U.S. growth will beat peers and keep U.S. interest rates relatively elevated.
The Federal Reserve has indicated that it will be more cautious in cutting interest rates as inflation remains stubbornly above its 2% annual target and the economy remains strong.
Policies by U.S. President-elect Donald Trump are also expected to boost growth and potentially add to upward price pressures.
“In terms of 2025 economic growth, there’s no rival to the dollar,” said Adam Button, chief currency analyst at ForexLive in Toronto.
“Capital flows dominate the turn of the year and the U.S. stock market has really put to shame every other global market,” Button added. “The dollar is the only game in town until there is a genuine stumble in the U.S. economy.”
Data on Thursday confirmed a still solid jobs market. The number of Americans filing new applications for unemployment benefits dropped to an eight-month low last week, pointing to low layoffs at the end of 2024.
The was last up 0.77% on the day at 109.38.
The euro dropped 1.01% to $1.025, its lowest since November 2022.
The single currency accelerated losses after it broke below the $1.03 level, indicating that technical factors were deepening the sell-off.
Traders anticipate deep interest rate cuts from the European Central Bank in 2025, with markets pricing in at least four 25-basis-point cuts, while not being certain of even two such moves from the Fed.
ECB policymaker Yannis Stournaras said on Thursday he expected the bank’s main interest rate to be cut to 2% by the autumn, from 3% currently.
Sterling, which held in better than most major currencies against the greenback last year, fell 1.19% to $1.2368, its lowest since April. Its fall accelerated after it broke through resistance around $1.2475.
The dollar gained 0.47% to 157.61 Japanese yen.
It reached a five-month high above 158.09 yen in late December, potentially putting pressure on the Bank of Japan, which is expected to raise interest rates early this year, but perhaps not imminently.
languished at 14-month lows as worries about the health of the world’s second-biggest economy, the prospect of U.S. import tariffs from the Trump administration and sliding local yields weighed on investor sentiment. CNY/
In cryptocurrencies, bitcoin rose 2.77% to $97,404.93.
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