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Analysis-For West African juntas, CFA franc pits sovereignty against expediency

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Analysis-For West African juntas, CFA franc pits sovereignty against expediency
© Reuters. FILE PHOTO: Burkina Faso’s interim President Ibrahim Traore attends a meeting with Russia’s President Vladimir Putin following the Russia-Africa summit in Saint Petersburg, Russia, July 29, 2023. Alexander Ryumin/TASS Host Photo Agency via REUTERS/File Ph

By Joe Bavier and Boureima Balima

JOHANNESBURG/NIAMEY (Reuters) – Days after Burkina Faso, Mali and Niger announced last month they were quitting the West Africa political union ECOWAS, Burkina Faso’s military ruler Ibrahim Traore was already naming his next target: the region’s CFA franc currency.

“It’s not just the currency. Anything that maintains us in slavery, we’ll break those bonds,” the 35-year-old army captain turned coup leader said in an interview, posted on YouTube.

The three countries jointly announced on Jan. 28 they were pulling out of the Economic Community of West African States (ECOWAS) after it pressured them to restore constitutional order following a string of coups.

Having already kicked out French soldiers and rolled back a U.N. mission in Mali, these states have consistently shown they value sovereignty over expediency.

Their attitude towards the euro-pegged CFA franc appears no different, although economists and experts say dumping the CFA franc would be riskier and significantly more complicated than withdrawing from ECOWAS, a move seen as a bold, if potentially ill-advised, act of defiance.

Last November, the finance ministers of Burkina Faso, Mali and Niger said they would weigh the option of setting up a monetary union and top officials from all three countries have, to varying degrees, voiced support for abandoning the currency.

The head of the Niger junta, Abdourahamane Tiani, said in an interview on state television on Sunday that abandoning the CFA franc would be a sign of sovereignty and a necessary step in moving away from French “colonisation”.

To do so, however, would mean much more than simply printing new banknotes.

A newly created central bank would need to manage a delicate transition away from the CFA franc, formulate monetary policy, and decide what to do about more than $4.6 billion in outstanding CFA-denominated regional bonds.

‘THE FRENCH ROBBED US’

The CFA franc currencies – one West African and another for Central Africa – sit at the heart of an emotional debate over sovereignty and development in French-speaking Africa.

Proponents hail the CFA franc’s peg to the euro as a guarantee of macroeconomic stability in one of the world’s most volatile regions.

Critics denounce it as a brake on growth and an outdated vestige of French colonial rule: until a 2019 reform, countries were required to hold a portion of their foreign reserves with the French Treasury.

But never since its inception in 1945 has there been the prospect of such a mass exodus.

“The French have robbed us with the CFA franc. African countries must definitively break with this currency,” said Omar Issoufou, a 25-year-old Nigerien who is studying electrical engineering in the capital Niamey.

The military takeovers that have swept across the arid Sahel region were driven by anger over Islamist violence, which Mali’s U.N. mission and a sprawling French anti-militant operation had failed to snuff out.

Punishment for the putsches – the imposition of economic sanctions by ECOWAS, including freezing of some of Mali and Niger’s assets held by the regional central bank – fuelled tensions between the new regimes and the West African Economic and Monetary Union, known by its French acronym UEMOA.

“The moment UEMOA became a weapon of war … I can understand why these three countries moved to clearly free themselves from their engagements towards the Union,” Hamma Hamadou, a former head of Niger’s tax authority, told Reuters.

Beyond ideological issues of sovereignty and practical concerns related to sanctions, some view moving away from the CFA franc as an opportunity.

“The CFA franc has been very detrimental to these countries over the long run,” said Ndongo Samba Sylla of International Development Economics Associates, a network of economists focused on the Global South. “They have lower inflation and extra exchange rate stability, but they’ve suffered from an over-valued currency.”

All three countries have largely agricultural economies. But their inability to set monetary policy has left their exports uncompetitive, he said, and hindered industrial development.

The peg to the euro, meanwhile, makes little sense when the bulk of West Africa’s external trade is done in dollars, he added.

‘GREAT DEPRESSION’

Withdrawing from ECOWAS is already looking easier said than done. Disentangling their economies and finances from UEMOA will be even more delicate.

UEMOA’s eight members deposit their foreign exchange reserves with the Dakar-based regional central bank. Those reserves are mutualised as are liabilities, making a determination of how much each country would be able to walk away with a difficult calculation.

Then there’s the question of CFA-denominated debt. Burkina Faso has over 1.2 trillion CFA francs ($1.99 billion) in outstanding bonds. Mali has slightly over 1 trillion CFA francs, while it’s 498 billion CFA francs for Niger.

“We will enter into a zone of turbulence if these countries pull out,” said one financial expert involved in regional debt issuances, who asked not to be named due to market sensitivity.

There was no clarity, he said, on where the bonds would be listed, whether they would remain in CFA francs or even if the new currency would be convertible.

“There would be a lot of problems for the holders of these sovereign bonds,” he said.

The turmoil would likely leave the three states cut off from future financing from regional and international capital markets, experts said. Burkina Faso already called off a bond auction in the wake of its ECOWAS withdrawal announcement due to a lack of interest.

Uncertainty could provoke capital flight and an immediate depreciation of a new currency. Imports could become prohibitively expensive, fuelling run-away inflation.

“I think you’re taking 10% to 20% off your GDP,” said Charlie Robertson, head of macro strategy at London-based FIM Partners. “Leaving the single currency is bringing on the Great Depression,” he said, adding it would be the worst policy mistake the countries could make.

In light of these risks, the juntas are approaching the currency question more carefully than their ECOWAS withdrawal.

Two government officials from the countries told Reuters that the committee charged with studying a new monetary union, while still planned, had not yet met.

Prime Minister Choguel Maiga of Mali – the only one of the three to have ever issued its own currency – has urged patience.

When Mali exited UEMOA in 1962 in the wake of independence, its new currency was at parity with the CFA franc, but upon its return to the union in 1984 was worth only half as much.

To ensure lessons have been learned, Maiga says the committee needs time to assess all the implications before the country draws up plans for a new currency with its two neighbours.

“This is what I say to the Malians,” Maiga told business leaders last month. “Sure, you have this passion. You want it. But this is strategic.”

($1 = 604.0000 CFA francs)

Forex

Dollar poised to finish week higher after inflation data, Fed rate cut

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By Chibuike Oguh

NEW YORK (Reuters) -The U.S. dollar pulled back from a two-year high on Friday, but was heading for its third-straight week of gains, with data showing a slowdown in inflation two days after the Federal Reserve cut interest rates and indicated inflation was stubborn enough to scale back cuts in 2025.

The dollar was down 0.72% against a basket of six other currencies at 107.64 after spiking as high as 108.54 – its highest level since November 2022. It was set to end the week 0.72% higher.

Commerce Department data showed the personal consumption expenditures price index – the Fed’s preferred inflation gauge – rose 0.1% in November after an unrevised 0.2% gain in October.

But in the 12 months through November, the PCE price index advanced 2.4%, compared with a 2.3% increase in the year to October.

The Fed cut interest rates by 25 basis points on Wednesday, with officials indicating that fewer cuts were coming in 2025 as inflation remained above the targeted range despite its recent downward trajectory.

The yield on benchmark U.S. 10-year notes fell 6.2 basis points to 4.51%, after hitting a 6-1/2-month high following the Fed’s rate decision.

“The inflation numbers today were more benign than feared; the Fed tilted its focus back towards inflation in this week’s meeting, and then the numbers weren’t so worrisome,” said Adam Button, chief currency analyst at ForexLive.

“I think the market heard the words of the Fed and got worried about inflation. But then the numbers show that it’s still slowing and certainly not at worrisome levels.

The U.S. government will begin a partial shutdown if Congress does not extend a deadline for a spending bill backed by President-elect Donald Trump to pass by midnight on Friday. The bill failed to pass in the House of Representatives on Thursday.

The dollar weakened 0.79% to 0.892 Swiss francs, on track for a weekly loss.

The euro edged higher after dipping to a one-month low of $1.03435 on the session, on track for its third-straight week of losses, weighed down partly by Trump’s comments that the European Union must purchase more U.S. oil and gas to make up for its “tremendous deficit” with the world’s largest economy, or face tariffs. It was last up 0.76% at $1.044175.

The dollar dropped to a five-month low of 157.93 Japanese yen after the Bank of Japan left interest rates unchanged. It was last down 0.89% at 156.01 yen.

Sterling dipped to a one-month low of $1.2475 but was last up 0.77% at $1.25990, still on track for a third straight week of losses. The Bank of England kept interest rates on hold on Thursday.

The dollar weakened 0.18% to 7.295 on the offshore market. The Australian dollar weakened 0.43% to $0.6263, while New Zealand’s dollar strengthened 0.53% to $0.566.

“You basically have an interest rate play between Wednesday’s Fed meeting and it’s not so much what they did, but the catalyst was the change in the economic projections for the Fed funds rate next year,” said Joseph Trevisani, senior analyst at FXStreet.com.

“The market is seeing that the Fed is pulling back. I’ve long thought they would pause in January. I’m pretty sure they will.”

Currency bid prices at 20 December​ 06:57 p.m. GMT              

Description RIC Last U.S. Close Previous Session Pct Change YTD Pct High Bid Low Bid

Dollar index 107.66 108.43 -0.7% 6.20% 108.54 107.58

Euro/Dollar 1.0438 1.0364 0.72% -5.43% $1.0445 $1.0344

Dollar/Yen 156.09 157.335 -0.77% 10.69% 157.875 155.975

Euro/Yen 162.93​ 163.13 -0.12% 4.69% 163.66 162.36

Dollar/Swiss 0.892 0.8987 -0.76% 5.97% 0.899 0.8917

Sterling/Dollar 1.2595 1.2503 0.76% -1.01% $1.2613 $1.2475​

Dollar/Canadian 1.4361 1.4399 -0.25% 8.35% 1.4435 1.4336

Aussie/Dollar 0.6263 0.6238 0.46% -8.1% $0.6274 $0.6215

Euro/Swiss 0.9308 0.9312 -0.04% 0.24% 0.9319 0.9287

Euro/Sterling 0.8284 0.8287 -0.04% -4.43% 0.8313 0.8272

NZ Dollar/Dollar 0.566 0.5631 0.55% -10.4% $0.5672 0.5615

Dollar/Norway 11.3073​ 11.4263 -1.04% 11.57% 11.4726 11.3077

Euro/Norway 11.8051 11.856 -0.43% 5.18% 11.892 11.8072

© Reuters. FILE PHOTO: Banknotes of Japanese yen and U.S. dollar are seen in this illustration picture taken September 23, 2022. REUTERS/Florence Lo/Illustration/File Photo

Dollar/Sweden 11.0032 11.0238 -0.19% 9.3% 11.0608 10.9884

Euro/Sweden 11.4869 11.4283 0.51% 3.25% 11.4929 11.431

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Intervention to halt dollar merely gives it legs :Mike Dolan

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By Mike Dolan

LONDON (Reuters) -The U.S. dollar’s latest surge has forced central banks around the world to lean against it, selling greenback reserves to stabilise local currencies but potentially exaggerating dollar strength into the bargain and sowing problems down the line.

If hard cash reserves, typically banked in U.S. debt, are run down sharply, it may just aggravate Treasury yields higher at the margins and bolster one of the main reasons for dollar strength in the process. Until tightening Treasury yields eventually force foreign capital out of “exceptional” U.S. markets at large, the process could spiral from here.

The Federal Reserve’s “hawkish cut” on Wednesday provided the latest spur to the greenback by forcing markets to rethink the rate horizon next year and suspect the Fed’s new 4.38% policy rate may now not get back below 4% in the current cycle.

As U.S. Treasury yields climbed on both that hawkish message and higher Fed inflation forecasts, the dollar went with them – jarring many major emerging markets still dependent on significant dollar funding and fearful of promised tariff hikes from a Donald Trump White House.

The Fed’s own broad trade-weighted – up almost 40% over the past decade – is again stalking the record highs set in 2022, with the inflation-adjusted “real” index less than 2% from all-time highs too.

The latest twist has proven painful for many emerging economies in particular, with many coping with both looming trade threats and domestic crises.

Brazil is a standout, where the real has lost more than 20% of its value this year and 12% of that in the past three months – hit by rising budget concerns even in the face of a 100 basis point central bank rate rise this month.

The currency shock has forced the central bank to intervene in the open market and it sold $5 billion in a surprise second auction on Thursday – the largest of its kind since the Brazilian currency floated in 1999.

The central bank has now held six spot interventions since last week, selling a total of $13.75 billion, in addition to three dollar auctions with repurchase agreements of $7 billion.

But Brazil’s far from alone.

Exaggerated by a recent government crisis, South Korea’s won has dropped to its lowest in 15 years, while India’s rupee hit a record low and Indonesia’s rupiah struck a four-month trough.

All three central banks actively sold dollars on Thursday along with strong verbal warnings of further action.

China, which holds the world’s biggest hard cash stash and is the second biggest holder of Treasuries, is also suspected to have sold dollars on Thursday to shore up the yuan’s slide to 2024 lows.

According to JPMorgan, capital outflows from emerging economies excluding China were some $33 billion in October alone. Including China, it was $105 billion – the biggest monthly exit of money since June 2022 just before the U.S. election.

While flows stabilised just before this week’s Fed meeting, pressure is clearly back now into year-end.

“We could be moving into a new equilibrium – one where emerging market portfolio flows might struggle,” JPM analyst Katherine Marney told clients.

BALLOONING US LIABILITIES

But does it still matter for Treasuries if emerging market central banks pull back, with less demand for U.S. debt or even outright sales of notes and bonds?

Together, entities from China, Brazil, South Korea and India account for about $1.5 trillion of overseas holdings of Treasury Securities.

That might seem small against a total of $28 trillion outstanding marketable Treasury securities. What’s more, those tallies may flatter what are official holdings and dollars sold in intervention may not necessarily involve the rundown of debt securities per se.

But these countries are also likely not the only ones selling dollars into the new rally and the extent of any overall hit may yet affect demand for Treasuries at the margin at a sensitive time.

With U.S. debt and fiscal concerns already high surrounding an incoming Trump administration and the Fed, any additional spur to Treasury yields would only add to the pressure.

The more Treasury yields climb, the higher the dollar will probe and the overall heat from U.S. markets may start to scare the rest of the world that’s so now heavily invested there.

Perhaps the big question next year is the extent to which spiraling Treasury yields eventually puncture the expensive and crowded U.S. stock market. That could undermine the massive overseas inflow to an “exceptional” United States over the past decade and inflate the overvalued dollar.

That overwhelming foreign demand for U.S. securities and the vast outperformance of U.S. stock prices and the dollar over recent years has ballooned the U.S. net international investment position (NIIP) to a deficit of $22.5 trillion by mid 2024, according to the latest figures.

That’s now some 77% of GDP – twice what it was 10 years ago.

U.S. liabilities increased by $1.4 trillion to a total of $58.52 trillion, due mainly to rising U.S. stock prices that lifted the value of portfolio investment and direct investment liabilities.

But some $391.1 billion of additional foreign purchases of U.S. stocks and long-term debt securities contributed to the liability increase.

Overall, portfolio investment liabilities increased $666 billion to $30.89 trillion and direct investment liabilities increased $568.2 billion to $16.64 trillion, mostly attributable to Wall Street gains.

All that has likely expanded further since June.

© Reuters. FILE PHOTO: U.S. dollar banknotes are seen in this illustration taken March 10, 2023. REUTERS/Dado Ruvic/Illustration/File Photo

The lofty U.S. dollar and Wall Street prices – and seemingly ubiquitous bullishness about the outlook for 2025 – mean any disturbance to capital flows and exchange rates at this stage could seed a dangerous and largely unforecast market reversal on a grand scale.

The opinions expressed here are those of the author, a columnist for Reuters.

(by Mike Dolan X: @reutersMikeD; Editing by Sam Holmes)

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Dollar set for weekly gains ahead of key inflation release

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Investing.com – The US dollar slipped slightly Friday, pausing for breath after strong gains this week as traders await the release of the Fed’s preferred inflation gauge.

At 04:40 ET (09:40 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 107.960, after earlier this week climbing to a two-year high.

Dollar on course for weekly gains

The has slipped slightly Friday, but is still on course of weekly gains of around 1%, bolstered by a relatively hawkish US rate outlook after the last Federal Reserve policy meeting of the year earlier this week.

The US central bank policymakers now only sees an additional 50 basis points of easing in 2025, a likely two cuts of 25 basis points, instead of the four reductions indicated in the previous forecasts in September. 

The November is expected to rise 2.9% on an annual basis, up from 2.8% the prior month, while the monthly figure is seen climbing 0.2%, a slip from 0.3% in October. 

A stronger-than-expected rise in the core PCE index could have an outsized impact on markets, as the hawkish nature of the Fed’s comments has shifted the likelihood towards fewer or potentially no further reductions next year.

“Market pricing moved hawkishly and towards our view of just one further 25 bps cut outlined in our team’s 2025 outlook,” analysts from Macquarie said in a note.

Sterling near one-month low after weak retail sales

In Europe, traded largely flat at 1.2500, after falling on Thursday to a one-month low after Bank of England policymakers voted 6-3 to keep interest rates on hold on Thursday, a bigger split than expected, amid worries over a slowing economy.

Data released earlier Friday showed that British rose by a weaker-than-expected 0.2% in November, below the expected jump of 0.5%.

rose 0.2% higher to 1.0385, just off a one-month low, and still on track for a weekly drop of over 1% on the back of the dollar’s strength.

rose unexpectedly in November, increasing by 0.1% on the year, instead of the 0.3% decline predicted, while the business climate index in Germany’s retail sector fell slightly, the Ifo Institute said on Friday.

This year was very challenging for the retail sector and the overall economic environment is likely to remain difficult in 2025, “even though many retailers are hoping for an improvement in consumer sentiment,” said Ifo expert Patrick Hoeppner.

The lowered its key rate last week for the fourth time this year, and is likely to cut interest rates further in 2025 if inflation worries fade.

Yen helped by CPI data

In Asia, fell 0.4% to 156.74, as for November read slightly stronger than expected, strengthening the case for an eventual rate hike by the .

But the yen was nursing a tumble to its weakest level in five months on Thursday, after comments from Governor Kazuo Ueda suggested that a hike will come later rather than sooner in 2025. 

edged 0.1% higher to 7.3050, hitting its highest level since November 2023.

The People’s Bank of China left its benchmark unchanged on Friday, as widely expected, with the central bank seen having limited headroom to cut rates further amid sustained yuan weakness.

 

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