Most emerging market currencies expected to increase
Volatility expected in the near term
Only South Korea’s won and Thai baht expected to recoup losses from 2022
Emerging market assets
benefiting from exposure to commodities and weaker US dollar
Interest rates, led by the Fed, will largely determine performance of emerging markets
Chinese yuan, Indian rupee, Indonesian rupiah, Singapore dollar, and Vietnamese dong to gain 0.5-3% in a year
Philippine peso expected to weaken by 1%
Russia’s ruble to gain 3% to 77.0 per dollar in the next six months
South African rand to gain 2% to 17.5/$ in the next 12 months
Turkey’s lira to fall by another 15% to 22.5 per dollar in a year.
Most emerging market currencies are expected to increase over the coming year, as investors become less cautious and invest in riskier assets, according to a Reuters poll of 60 foreign exchange analysts. However, the poll also predicts volatility in the near term, with only South Korea’s won and the Thai baht expected to recoup their losses from 2022. The following are the key points from the poll:
Emerging market assets have benefited from their exposure to commodities and a weaker US dollar, as the Federal Reserve signals a pause in its tightening cycle.
Analysts expect emerging market currencies to outperform their G10 peers, due to attractive real yields and improved risk appetite.
The path of interest rates, led by the Federal Reserve in the near term, will largely determine the performance of emerging markets.
The Chinese yuan, Indian rupee, Indonesian rupiah, Singapore dollar, and Vietnamese dong are expected to gain between 0.5-3% in a year, while the Philippine peso is forecast to weaken by 1%.
Russia’s rouble is expected to gain 3% to 77.0 per dollar in the next six months, supported by higher oil prices.
The South African rand, down 5% so far this year, is expected to gain 2% to 17.5/$ in the next 12 months.
Turkey’s lira is set to fall by another 15% to 22.5 per dollar in a year, due to uncertainty surrounding Turkish presidential and parliamentary elections in May.
Historical View Point
The U.S. dollar has been the kingpin of global trade and capital flows for many moons, but lately, many countries have been exploring alternatives to the greenback to reduce their dependence on the United States.
After World War I, the U.S. emerged as the leading financial power and the dollar quickly displaced the pound sterling as the international reserve currency. The Bretton Woods Agreement in 1944 cemented the dollar’s dominance, creating a collective international currency exchange regime pegged to the U.S. dollar and gold.
However, since the 1970s, the purchasing power of the dollar has been dwindling, and countries have been searching for alternatives to the U.S. financial system. Initiatives and policies aimed at de-dollarization have emerged, including currency swap arrangements and diversifying reserve holdings into currencies like the euro and the Chinese yuan.
The inflationary pressures in the U.S. economy and the government’s fiscal policies, such as increased spending and rising debt levels, have contributed to the dollar’s decline. As a result, the Federal Reserve has had to adopt a more accommodative monetary policy, which has weakened the dollar further.
The U.S. dollar has been the dominant international reserve currency for some time, but its purchasing power has been steadily eroding since the 1970s. This has led to several initiatives aimed at reducing reliance on the U.S. financial system and exploring alternatives. The inflationary pressures and fiscal policies have only added to the dollar’s woes, necessitating more accommodative monetary policies from the Federal Reserve.
USD impact if Countries Pulled away:
The impact of countries moving away from the US dollar as their primary reserve currency would depend on a number of factors, including the size and influence of those countries, the speed and extent of the shift, and the reactions of other countries and global financial institutions.
In general, if several large and influential countries were to move away from the US dollar, it could lead to a decline in demand for the currency, which could in turn lead to a decrease in its value relative to other currencies. This could make imports more expensive for the US and increase inflation.
At the same time, countries moving away from the US dollar may seek to diversify their holdings into other currencies, such as the euro, yen, or yuan, which could lead to a shift in global economic power and potentially reduce the dominance of the US in the global economy.
It’s important to note that the US dollar is currently the world’s dominant reserve currency, and any significant shift away from it would likely take many years or even decades to unfold. It’s also possible that the US could take steps to mitigate the effects of such a shift, such as increasing the attractiveness of its currency through policy changes or negotiating new trade agreements with other countries.
What happens to the Value of the USD then?
If several countries were to move away from the US dollar as their primary reserve currency, it could lead to a decrease in demand for the US dollar, which could in turn cause its value to decline relative to other currencies.
This is because the value of a currency is largely determined by the supply and demand for it in global markets. If there is less demand for US dollars, then the value of the currency could decrease as a result. Conversely, if there is greater demand for a currency, its value could increase.
However, it’s important to note that the value of the US dollar is influenced by many other factors, including economic conditions, geopolitical events, and monetary policy decisions by the US Federal Reserve. Therefore, any potential impact on the value of the US dollar from countries moving away from it as a reserve currency would need to be considered in the context of these other factors.
The adoption of Yuan vs USD
The decision of whether to adopt the yuan or the US dollar as a primary currency would depend on a number of factors, including a country’s trade relationships, geopolitical considerations, and the stability and convertibility of the currencies in question.
Currently, the US dollar is the most widely held and traded reserve currency in the world, accounting for approximately 60% of global foreign exchange reserves. The yuan, on the other hand, accounts for less than 2% of global reserves, although it has been steadily increasing in popularity in recent years.
While the yuan is the currency of the world’s second-largest economy and is becoming more widely accepted in international trade, it still faces challenges in terms of convertibility, liquidity, and transparency. The Chinese government maintains a tight control over the value of the yuan, which can create volatility in global markets and make it difficult for other countries to use it as a primary currency.
The De-Dollarization Effect Risks:
There are several potential risk factors if other countries decide to De-dollarize and adopt other currencies:
Economic Instability: If a large number of countries decide to shift away from the US dollar as the global reserve currency, it could lead to economic instability. The US dollar is currently the most widely accepted currency in the world, and many countries hold large amounts of US dollars in their foreign exchange reserves. If these countries were to shift away from the dollar, it could lead to a significant reduction in demand for the currency, potentially causing its value to fall and leading to economic turmoil.
Reduced US Economic Influence: The US dollar has traditionally been a symbol of American economic and political power. If other countries begin to adopt alternative currencies, it could reduce the influence of the United States in global economic affairs.
Geopolitical Tensions: De-dollarization could also lead to geopolitical tensions between the United States and other countries. The US has historically used the dollar as a tool of foreign policy, and a shift away from the currency could be seen as a challenge to American power.
Currency Volatility: If other currencies become more widely used, it could lead to increased volatility in the global currency markets. This could make it more difficult for businesses and governments to plan and invest, and could lead to greater uncertainty in the global economy.
Increased Transaction Costs: If countries begin to use multiple currencies, it could lead to increased transaction costs for businesses and consumers. This could make it more difficult for businesses to operate across borders and could lead to higher prices for consumers.
A regression analysis of CNY-USD Analysis
A regression analysis of the CNY-USD with impact on the Saudi Riyal, Euro USD, INR USD, Brazilian Real, Russian Ruble, shows that the CNY-USD is not correlated with the INR USD, Brazilian Real, Russian Ruble and the Saudi Riyal. However, a small correlation of the CNY-USD to EURO-USD can be observed. What this tell is that with P-Value greater than 0.05, there is not going to be a significant impact of the CNY-USD on these Currencies and the future changes of how the adoption framework of many countries largely depends on how Currency volatility, Economic stability go forth in the future.
Analysis of the Chart between CNY-USD and the predicted CNY-USD Regression Results show that the analysis has values that are significantly deviating from the value of the CNY USD and at various time frame reverting back to the mean.
Our Analysis of the CNY-USD
- Prices stay above the HPT filter with a value of 6.5
- From the Wisdom Tree Long CNY and Short USD we can observe that the prices are increasing, suggesting that investors are long CNY and Short USD.
- The RSI and Momentum for the ETF is also increasing, suggesting a short term bias to the upside.
USD and Financial Crisis
When the value of the USD depreciates, it means that the currency is worth less compared to other currencies. This can happen for a variety of reasons, including a decrease in demand for the currency, an increase in the supply of the currency, or a decrease in the perceived value of the currency relative to other currencies.
The impact of a depreciating USD on the currency and financial crises can be complex and depends on a variety of factors. Here are some possible scenarios:
Boost Exports: A weaker USD can make US exports more competitive and attract more foreign investment. This can help increase demand for US goods and services, which can stimulate economic growth and reduce the trade deficit.
Increase Inflation: A depreciating USD can also lead to higher inflation as the cost of imported goods, such as oil and other commodities, increases. This can lead to higher prices for consumers and reduce the purchasing power of the USD.
Debt Burden: If the US has a high level of foreign debt, a depreciating USD can increase the burden of that debt, as it will take more dollars to pay off the debt in other currencies.
Capital Outflows: A sharp depreciation of the USD could also trigger capital outflows from the US as investors seek higher returns in other currencies. This can lead to a further decline in the value of the USD and potentially trigger a financial crisis if it leads to a liquidity crunch in US financial markets.
The overall Risk of Currency crisis developing the First quarter of 2024 for other markets is Higher. But for Developed and Emerging markets the risks considerably lower. Even for the Developed Markets the risk of a currency crisis is lower going forward for 2024.
USD and Banking Crisis:
Currency Exchange Rates: When the USD depreciates, the exchange rate against other currencies falls, making it more expensive for banks to convert foreign currencies. This can lead to increased transaction costs and potentially reduce profits.
Debt Burden: Banks that hold a significant amount of foreign debt denominated in USD may face increased debt burden due to the depreciation of the currency, making it more difficult to repay their debt obligations.
Risk Management: A depreciation of the USD can also increase risk for banks that have engaged in foreign exchange transactions or have large exposures to foreign assets. Banks may need to adjust their risk management strategies to account for the increased volatility in currency markets.
Capital Inflows/Outflows: A sharp depreciation of the USD could trigger capital outflows or inflows from foreign investors, which could impact the liquidity and stability of banks that rely on foreign investment to fund their operations.
Regulatory Changes: A depreciation of the USD may prompt regulatory changes in the banking sector, as policymakers seek to mitigate the risks posed by a weaker currency. This could include measures such as increased capital requirements or tighter restrictions on foreign exchange transactions.
High-income countries have high levels of economic development and stable financial systems. However, they are still vulnerable to banking crises caused by factors such as recessions, market volatility, and irresponsible lending. A banking crisis can lead to a loss of confidence in the financial system and, in extreme cases, a complete collapse. To mitigate this risk, high-income countries have well-developed regulatory frameworks and supervisory mechanisms in place. Nevertheless, it is important for these countries to maintain strong financial systems to ensure stability and prevent potential crises.
Possible Strategies for the Future:
Strategy Type | Description | Advantages | Risks |
Hedging Strategy | Invest in other currencies that are likely to appreciate relative to the USD or use currency derivatives such as futures or options to hedge against currency risk. | – Can provide a hedge against currency risk. – Can potentially generate profits if the currency appreciates. | – Currency risk is not completely eliminated. – Derivatives trading involves a high level of risk and can lead to significant losses. |
Investment Strategy | Invest in assets that are likely to appreciate in value when the USD depreciates, such as commodities like gold or US companies with significant overseas revenue. | – Can potentially generate profits if the asset appreciates in value. – Can provide a hedge against currency risk. | – Asset prices can be volatile and unpredictable. – The investment may not perform as expected. |
Conclusion:
In summary, the U.S. dollar has been the dominant international reserve currency for several decades, but its purchasing power has been declining since the 1970s. This has led many countries to explore alternatives to reduce their dependence on the U.S. financial system. The inflationary pressures and fiscal policies in the U.S. have further weakened the dollar, forcing the Federal Reserve to adopt a more accommodative monetary policy. As a result, initiatives aimed at de-dollarization have emerged, including currency swap arrangements and diversifying reserve holdings into other currencies like the euro and the Chinese yuan. Ultimately, the decision to adopt the yuan or the US dollar as a primary currency would depend on a country’s individual circumstances and priorities. Both currencies have their strengths and weaknesses, and the choice would depend on a range of economic and political factors. Overall, de-dollarization could have significant implications for the global economy and could lead to a period of economic and political uncertainty. However, the exact risks will depend on the specific currencies that are adopted and the pace and scale of the transition away from the US dollar.
