Just two weeks after de-dollarisation was high on the agenda at the BRICS conference in Johannesburg, the mighty American greenback has reminded the world that it remains its preeminent currency. Although well off its peak of October 2022, the US dollar is currently trading near a six-month high against a basket of currencies, making strong gains against developed and developing world currencies alike.
The yuan fared particularly badly this week, under pressure not only from a rampant US dollar but also from China’s domestic economic woes. Other Asian emerging market currencies also took a severe knock because of their exposure to weak growth in China. The South African rand similarly suffered as a result and not necessarily due to stage 6 loadshedding returning, hitting its worst levels in months, before recovering slightly on Thursday and Friday.
Seasonality offers a partial explanation for the surging dollar. According to Reuters, the USD index has climbed in September in each of the last six years, suggesting a possible upside bias as northern hemisphere market participants return from their summer break. Also at play are a rising oil price and resilient economic indicators in the US, suggesting that US interest rates may remain at high levels for longer.
For the foreseeable future, the direction of most other currencies and economies will be largely determined by how the US economy performs, and the monetary policy set by the Fed. As we outlined in our recent article about de-dollarisation, the dollar’s reserve is a massive competitive advantage for the US and one that is likely to endure for decades in the absence of any credible alternatives.
Most economists expect the US dollar to only start weaking in six to nine months, when the Fed is forecast to start cutting interest rates. Until then, other countries may see outflows of capital as investors choose the safe haven and higher interest rates the dollar offers to them. The US dollar’s continued strength is a reminder that you bet against it at your peril.
“The dollar is our currency but your problem.”
– John Connally, Treasury Secretary to Richard Nixon
Global News
- The dollar extended its rise to a six-month high as investors focused on the robust growth picture in the US. The Bloomberg dollar index is on track for an eighth consecutive week of gains, which would be the longest ever run of gains in data going back to 2005.
- As the US labour market cooled last month, with unemployment slightly higher and wages back to rising at pre-COVID levels, hopes are rising that the Fed is being successful in terms of its plans for a soft landing. While investors expect the Fed to hold rates at its September meeting, the probability that it will raise them in November has ironically increased to 53.3%, according to Bloomberg.
- Given that the US economy has been looking so solid recently, Fed officials will likely need to double their projection for growth in 2023 when they publish an updated outlook later this month. One unofficial estimate produced by the Atlanta Fed even suggests the economy could grow 5.6% on an annualised basis in the third quarter.
- However, research by the Federal Reserve Bank of San Francisco has found that interest rate increases reduce potential economic output for at least 12 years. This contrasts with traditional theories of national economies that assume policy is neutral in the long run.
- The increase in value of the US dollar is pushing Asian currencies to multi-month lows and keeping the euro under pressure. Japan’s top currency official says the nation is ready to act amid speculative market moves that are pushing the Yen lower. The managed Yuan has weakened to a level unseen since 2007.
- UK workers will be much worse off heading into the next election than they were in 2019, according to the Resolution Foundation. The current socio-economic situation, including steep inflation and tax rates, mean workers are on track to suffer the worst fall in incomes over a five-year period since the 1950s.
- Chinese President Xi Jinping’s firm grip on power in the communist country is being challenged as his strategy to take the economy into a new era driven by innovation and consumer spending is coming under pressure. This is because consumer spend and private investment is down, amid other issues. Growing financial distress means big problems for the nation’s nearly $3 trillion shadow banking industry.
- Supporting the case for the dollar over the yuan, Bloomberg Economics forecasts that it will take until the mid-2040s for China’s gross domestic product to exceed that of the US, and only by a narrow margin. The communist country’s GDP will then fall back behind that of the Western Country, in their estimation.
- Indian President Narendra Modi wants to assert the nation’s presence on the world stage. His vision has India as the fulcrum between Washington and Beijing, beholden to neither and free to pursue its own national interests to build its economy and claim a greater global role ahead of the G20 Summitt to be held in India.
- Google and parent company, Alphabet, face their most significant legal challenge yet as the Justice Department and several states argue that Google illegally used agreements with Apple and Samsung, and internet browsers like Mozilla, to be the default search engine for their users, preventing smaller rivals from getting access to that business.
- Apple is trying to prevent a crisis in China ahead of its unveiling of the new iPhone 15 on Tuesday; an event that will be livestreamed from headquarters Apple Park, in Cupertino, California. The risks include an increasing ban on iPhones among government workers, competition from China’s Huawei, and a resurgence in Chinese nationalism that spurs consumers to shun foreign-branded devices. Apple’s shares slid almost 3% yesterday over the government ban.
- As at Thursday’s close the S&P was down1.4% for the week.
Local News
- South Africa’s economy grew ahead of expectations in the second quarter at 0.6% quarter-on-quarter, showing that June’s moderation in blackouts had a positive impact after high levels of load-shedding in April and May. Expectations were for 0.1% growth following a 0.4% gain in the first quarter.
- Despite this, business sentiment remained weak in the third quarter, although it did gain somewhat from 27 to 33 quarter-on-quarter, according to the latest RMB/BER Business Confidence Index published on Wednesday.
- The report into the docking of the Lady R in Simon’s Town has failed to clarify details surrounding the armaments on the vessel. An in-depth analysis is available here. A Business Day editorial opines that keeping the report locked away will not restore any confidence in government.
- However, the risk of South Africa’s removal from the African Growth and Opportunity Act and being sanctioned over its ties to the Kremlin have dimmed, according to Standard Bank group CEO Sim Tshabalala. This is because the US appears to be satisfied with SA’s commitment to the UN charter which defends the sovereignty and integrity of nations.
- Although South Africans will have to brace themselves for continued rolling blackouts as Eskom carries out planned maintenance, Ramaphosa has assured the nation that the lights would be back on soon. However, Electricity Minister Kgosientsho Ramokgopa, who previously claimed that the recent changes to Eskom’s board and management were yielding positive results in addressing loadshedding, has now said there are no shortcuts to ending this problem. It is well known that the previous failure to adhere to planned maintenance was a major cause of Eskom’s issues. He has reaffirmed their commitment to sticking to planned maintenance, while acknowledging that any unplanned capacity loss would intensify loadshedding.
- Public enterprises minister Pravin Gordhan has been ordered by the Pretoria high court to decide on an application by Mango’s business rescue practitioner for the sale of the airline within 30 days else it will be deemed to have been approved.
- TFG, which owns Markham, Foschini, Sportscene, Jet, and Sterns amongst many other brands, expects headline earnings per share for the six months to end-September to drop as much as 25% because of declining sales in all its markets.
- Shoprite has put aside R8.5 billion for shop upgrades, new stores, and more warehouse space next year. Shoprite boasted market share gains of R8.1 billion in its 2023 financial year to 2 July 2023. Its home-delivery app, Checkers Sixty60, grew sales by 81% in the same period.
- As at the time of writing, the rand was 1.6% weaker and the ALSI was 2.1% down for the week.
Sources: Dynasty, BusinessLIVE, Financial Mail, Bloomberg, The Guardian, NYT, CNN, WSJ, TechCentral, Daily Investor, FX Street, etc.