The Weight of the Dollar
All the currencies are getting pummelled. Will they continue to remain subservient to the dollar or chart a new course?
The recurring lockdowns in China have thrown demand-supply out of kilter. To add to this, the sanctions on Russia have hurt fuel supply making supply chains expensive. This produced a whole host of unintended outcomes.
DXY is an Index that tracks the US dollar against a basket of currencies across the globe. It shows the strength and the weakness of the USD. It has been on a tear.
The War in Ukraine has sent the currency spiralling upwards as capital tries to exit uncertain markets. Further, inflationary pressures across the world are forcing investors to convert their monies to USD. You do not want to be holding a currency that is depreciating faster than the USD due to high inflation. Not to mention, the increase in interest rates by the Fed to tame inflation, has only driven more money back into the USD. It is also offering better returns!
Both these factors have led to the strengthening of the US dollar.
From an Indian context, for example, a strengthening US dollar means
It is easier for exporters to export their goods as it is cheaper for Americans to buy it
It is more expensive for importers and American companies to sell their goods in India. So they will find that their India sales are slowing down.
American investors/investment funds that have invested in India get squeezed. If they had invested when the dollar was 75 rupees to a dollar and hoped for a 24% return, the current rate of 82 rupees to a dollar erodes 10% of that return.
Indian exporters would like to embrace the dollar, and Importers would like to shun it. TCS posted 8% growth in profits, this is certainly helped in part by the erosion of the Rupee.
Ditto for all other countries at this moment.
Source: Yahoo Finance
Source: Yahoo Finance
The Euro has fallen below dollar parity and the British Pound has been hit by the triple whammy of unstable leadership, war and Brexit.
India is pushing to decouple itself from the dollar, one baby step at a time.
Top lender State Bank of India has asked exporters to avoid settling deals with Bangladesh in the dollar and other major currencies as it looks to curb exposure to Dhaka's falling reserves, according to an internal document and a source.
Bangladesh's $416-billion economy is battling rising prices of energy and food as the Russia-Ukraine conflict widens its current account deficit, and dwindling foreign exchange forces it to turn to global lenders such as the International Monetary Fund (IMF).
Bangladesh’s woes are our gains. India gets to play the virtue game of helping out Bangladesh whose foreign reserves are dwindling, and get rid of the dollar in the middle.
Yes Bank and Russia's Petersburg Social Commercial Bank (PSCB) have taken the lead in facilitating rupee-rouble bilateral trade that seeks to bypass the US dollar, ensuring uninterrupted cross-border business with Moscow entities amid Western sanctions on the country. PSCB, however, doesn't feature in the list of sanctioned banks.
The Russian lender, which likely escaped the West's scanner because of its insignificant presence in Europe's richer neighbourhoods and other developed economies, has opened a rupee account with nearly three dozen Russian companies settling payments for trades with New Delhi.
Source: Economic Times
There is always a loophole!
Going back to Europe. The European countries are faced with a great reckoning. They can trade with India for instance with a direct peg to their currency rather than having to deal in US dollars which is only going to appreciate further due to the trade. EU for instance buys a lot of food and energy from countries that could sell directly in their own currency. Just these two sectors would be worth more than half a Trillion dollars.
The last time the world was confronted with such a situation was in 1985, the finance ministers of Japan, Germany, the UK and the US gathered at the Plaza Hotel in New York to hammer out a deal to weaken the US dollar. An agreement that came to be known as the Plaza accord.
There is no likelihood of another Plaza accord because the inflationary situation is helped by the strengthening dollar. A stronger dollar lowers inflation in the US. The Federal Bank would not want countries to cartelise against the dollar and beat it down. Not only the Feds but also the government would not want this given the mid-term elections are around the corner.
Something has to give.
Which G7 nation will blink? Do they have the political strength locally to lie down and take this?
Every kind of worker seems to be protesting in France. First it was oil, now it is transit. Italy has a new right wing leader at the helm. Liz Truss seems to be sinking in a morass of her own making every second.