Events in Asian currency markets this week illustrate why, in our view, the US dollar remains king of currencies, even with forecasts for the Fed to start cutting interest rates later this year. The Japanese yen slid to a 34-year low at near 152 per dollar, triggering an emergency meeting of Japan’s monetary authorities.
Government, central bank, and financial regulatory officials have indicated a willingness to intervene in the currency markets in response to further wild or speculative moves in the value of the yen. The weakness in the Japanese currency has helped to propel the Nikkei index to strong performance in local currency terms, but returns are less impressive in US dollar terms.
Meanwhile, currency markets were unsettled this week by reports that Chinese state-owned banks were intervening in currency markets. Authorities are tinkering with the yuan’s daily reference rate, which pegs the level from which the currency is allowed to deviate just 2%.
Bloomberg says opinions differ about whether the fixing of the yuan will stabilise the currency because the People’s Bank of China is trying to curb its depreciation, or whether volatility will increase as officials seek to guide the yuan lower, perhaps to boost exports. Some even wonder if there is an element of strategic ambiguity to keep traders off-guard.
Elsewhere, the Reserve Bank of India is thought to have sold US dollars via state-run banks earlier this week to protect the rupee after it slid to record lows the week before.
As these developments show, the US dollar’s position as the world’s reserve currency remains uncontested, as there are no credible alternatives. Continued economic outperformance in the US despite high inflation and a rising interest rate cycle, the transparency of its capital markets, and the depth of its asset pool, give the dollar an edge.
Dedollarisation therefore seems as distant a prospect as ever.
“The dollar’s backing is exemplified by a sound foundation, a history of credibility, and transparency that cannot be negated by its detractors. King dollar still reigns and will for the foreseeable future.”
– Quincy Krosby, LPL’ chief global strategist
Global News
- President Biden has averted a partial government shutdown by signing a $1.2 trillion funding package that keeps the US government running through to the end of September. His signature ended a partisan tug-of-war, marked by repeated infighting among Republicans over amendments.
- Federal Reserve Chairman Jerome Powell said on Wednesday that a surprise increase in unemployment could prompt the Fed to lower rates. However, four Federal Reserve officials are reconsidering forecasts they made three months ago that called for three rate cuts this year.
- US home prices increased at the fastest rate in months to a fresh record high in January, which highlights how a housing shortage combined with high mortgage rates continues to limit affordability. The S&P CoreLogic Case-Shiller US National Home Price index rose 6% in January from a year before, accelerating from a 5.6% annual increase in December. It’s the highest annual increase since late 2022.
- Polling on Tuesday showed that US President Joe Biden was gaining on Donald Trump in six battleground states. Biden now leads Trump by a point in Wisconsin, having trailed by four last month, and is tied in Pennsylvania, where Trump had a six-point lead in February. The two candidates were also tied in Michigan. In other key states, Trump was ahead in Arizona, Georgia, Nevada, and North Carolina. Only Georgia, however, showed an increased lead for the presumptive Republican nominee.
- Tuesday’s bridge collapse near the Port of Baltimore and a major highway closure will lead to transportation disruptions for weeks or months in the Mid-Atlantic region. Cargo is diverting to the US West Coast to bypass potential bottlenecks at trade gateways from Boston to Miami. The Biden administration is prioritising federal funding to clear debris and rebuild the bridge urgently.
- Zimbabwean annual inflation gained to a seven-month high, from 47.6% in February to 55.3% this month. Prices rose 4.9% in the month, compared with 5.4% in February, mostly driven by the cost of food and utilities including housing. The news landed just days after the finance minister pledged to address price increases that are being fuelled by the nation’s free-falling currency.
- Visa and Mastercard, as well as the banks that issue cards with them, are settling a competition matter that will result in lower fees at point-of-sale devices amounting to $30 billion over the next 5 years. The US-only settlement is the result of a lawsuit filed in 2005.
- Amazon is investing an additional $2.75 billion in Anthropic, bringing Amazon’s total investment in Anthropic, a well-regarded builder of AI tools able to generate text and analysis, to $4 billion, following an earlier investment announced in September.
- Alphabet, Apple and Meta are coming under increasing scrutiny as EU regulators told them that they were under investigation for potential violations of the region’s new competition law. The bloc wants to force Alphabet, Apple, Meta, and other tech giants to open up their platforms so smaller rivals can have more access to their users.
- As at Wednesday’s close the S&P 500 was down 0.2% for the week.
Local News
- South Africa’s government is meeting with US officials in a bid to reinforce political relations with the US amid discussions in Washington over a bill reviewing ties that is currently with the US House of Representatives. Amid geopolitical differences, minister of International Relations and Cooperation, Naledi Pandor, is countering claims of aligning with malign actors such as China, Hamas, and Russia. Meanwhile, President Cyril Ramaphosa has asserted a non-aligned stance amid evolving global dynamics.
- Lawmakers from the ANC have backed a new bill enabling the government to expropriate land without compensation in the national interest. The Expropriation Bill, voted on ahead of the upcoming May 29 elections where the ANC’s national majority is at risk, now awaits President Cyril Ramaphosa’s approval to become law. The bill was opposed by the main opposition parties, the Democratic Alliance, and the Economic Freedom Fighters, albeit for different reasons.
- MK leader Jacob Zuma is listed on the Electoral Commission’s candidate lists for parties contesting the May general elections. Zuma appears on the IEC list despite not being eligible as a candidate for elections and the ANC’s bid to prevent him contesting the vote.
- The Reserve Bank kept borrowing costs unchanged at 8.25%, a 15-year high. This is its final interest rate-setting meeting before elections in May, as the bank sees inflation returning to the midpoint of its target range later than expected. Governor Lesetja Kganyago said the bank only expects inflation to moderate to around 4.5% at the end of 2025. At this point, the bank will be confident to start cutting rates. Economists surveyed by Bloomberg expected the rate to remain unchanged. Traders agreed, with forward-rate agreements pricing in no chance of a rate cut until November.
- First-quarter consumer confidence improved to -15 points from -17 quarter-on-quarter thanks to an uptick in the confidence levels of high-income households. This suggests retail sales volumes could gradually start to recover. A year ago, the figure was at -23 according to a survey by the Bureau for Economic Research in partnership with FNB.
- Formal employment in the fourth quarter decreased by 194,000 jobs, or 1.8%, quarter-on-quarter mostly due to a 13.5% decrease in part-time employment especially in the community services sector, which lost 203,000 jobs over the period. Tuesday’s figures, released by Statistics South Africa showed that total employment in the formal sector is now 10.7 million.
- Logistics entity Transnet is moving ahead with the process of partnering with private sector companies that will use its group’s vast rail network to operate trains independently over the next three to five years. The plan should come into effect as early as next month.
- MTN, South Africa’s largest mobile operator, has successfully defended allegations by the South African Revenue Service that it engaged in transfer pricing activities in its international operations, short-changing the tax agency. The mobile operator invested R10.1 billion in its network in 2023 as it fought the impact of severe load shedding in the year to December 2023.
- Old Mutual is set to launch its banking proposition this year with only a few regulatory hurdles standing in its way. It completed the build of the core bank infrastructure at the end of last year within budget, or R1.75 billion.
- The Department of Higher Education has told Educor-owned tertiary institutions – Damelin, CityVarsity, Lyceum and Icesa – that they have until October to appeal deregistration. The institutions failed to provide 2020 and 2021 annual financial certificates, annual reports, and tax clearance certificates, which led to their deregistration. The educational centres must immediately phase out operations until the deadline.
- At the time of writing the rand was 0.2% weaker and the ALSI was 1.4% up for the week.
