How supercharged Dollar is tearing through numerous Asian currencies

How supercharged Dollar is tearing through numerous Asian currencies

Synopsis

KARACHI: Since the start of the current fiscal year 2022-23, the Pakistani rupee has fallen by nearly 27 percent, or over Rs40, against the US dollar over the last ten months, as the currency just exceeded the important threshold of 200 against the greenback. There are concerns that it will continue to lose value; nevertheless, Pakistan is not the only country experiencing currency erosion.

How supercharged Dollar is tearing through numerous Asian currencies

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KARACHI: Since the start of the current fiscal year 2022-23, the Pakistani rupee has fallen by nearly 27 percent, or over Rs40, against the US dollar over the last ten months, as the currency just exceeded the important threshold of 200 against the greenback. There are concerns that it will continue to lose value; nevertheless, Pakistan is not the only country experiencing currency erosion.

There is a slew of other countries, known as emerging markets, that are experiencing similar currency weakening, making their economy insecure and investors nervous. Its textbook examples are Japan and India.

The rupee’s devaluation in Pakistan has been ascribed to policies of the previous PTI-led administration, which adopted a market-based exchange rate, the cumulative impact of which has given the currency a hefty jolt over the past several months.

A graph of Pakistani rupee and US dollar parity since 2014 to 2022. — Trading Economics

A graph of the Pakistani rupee and USD parity from 2014 to 2022. — Trading Economics

When looking at international economies in general, the phenomenon has been largely sparked by the US Fed’s increase in the policy rate, which has encouraged international investors to repatriate dollars from risky markets where current account balances are a threat and are spiraling into larger deficits.

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The global economy is affected significantly by the increasing dollar. The effects of a stronger dollar on financial markets and the economy are also more complicated than most people realize, making the road ahead riskier for both investors and policymakers.

Let’s have a look at the US dollar’s parity with other currencies.

Indian rupee

The Indian rupee hit an all-time low of 77.8 against the US dollar last week, owing to continued foreign investment outflows, a stronger US dollar, and rising oil prices. The Indian currency has declined by nearly 4% since the beginning of the year, according to a report published in Financial Express.

A graph of Indian rupee and US dollar parity since 1998 to 2022. — Trading Economics

A graph of the Indian rupee and USD parity from 1998 to 2022. — Trading Economics

The Indian rupee is likely to trade at around 77.76 by the end of the current quarter, according to Trading Economics. “Looking forward, we estimate it to trade at 78.66 in 12 months,” it noted.

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Japanese yen

According to Trading Economics, the Japanese yen rose last week versus the US dollar to about 127 per dollar, a level not seen in a month, as investors rushed to buy the safe-haven currency amid widespread risk aversion and a deteriorating global economic outlook.

A graph of Japanese yen and US dollar parity since 1998 to 2022. — Trading Economics

A graph of Japanese yen and USD parity from 1998 to 2022. — Trading Economics

According to economists, the Japanese yen is predicted to trade at around 128.63 by the conclusion of the quarter. “Looking forward, we estimate it to trade at 130.73 in 12 months,” it noted.

Turkish lira

Last week, rising inflation and recession fears damaged the Turkish lira, which fell to 15.9 against the US dollar. By December, the lira will have sunk to an all-time low of 18.4.

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Soaring energy prices pushed Turkey’s inflation rate to a 20-year high of 70% in April, putting additional strain on the government’s already-fragile currency deposit protection plan, which is already under pressure due to low reserve levels and huge negative real interest rates.

“Currency stabilization measures by the central bank failed to contain depreciation, as authorities imposed reserve requirements to ease lending and encourage conversion of foreign currencies to the lira,” Trading Economics notes.

A graph of Turkish lira and US dollar parity since 1998 to 2022. — Trading Economics

A graph of the Turkish lira and USD parity from 1998 to 2022. — Trading Economics

According to Reuters, the currency has lost nearly 16 percent of its value against the US dollar this year, following a 44 percent drop in 2021.

The Turkish Lira is predicted to trade at 15.90 by the end of this quarter, according to global macro models and analysts’ predictions. “Looking forward, we estimate it to trade at 17.24 in 12 months,” it noted.

Chinese yuan

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As hopes for an end to Shanghai’s severe COVID shutdown countered disappointing Chinese economic statistics for April, the offshore yuan gained past 6.75 per US dollar last week, surging further from 20-month lows.

A graph of Chinese yuan and US dollar parity since 1998 to 2022. — Trading Economics

A graph of Chinese yuan and USD parity since 1998 to 2022. — Trading Economics

The Chinese Yuan is predicted to trade at around 6.72 by the end of this quarter, according to Trading Economics data. “Looking forward, we estimate it to trade at 6.79 in 12 months,” it noted.

UAE Dirham

On May 20, the United Arab Emirates (UAE) dirham was trading at 3.6726 against the US dollar. The UAE Dirham is predicted to trade at 3.67 by the end of this quarter, according to global macro models and analysts’ predictions. Trading Economics said, “Looking forward, we estimate it to trade at 3.67 in 12 months.”

A graph of UAE dirham and US dollar parity since 1998 to 2022. — Trading Economics

A graph of UAE dirham and USD parity since 1998 to 2022. — Trading Economics

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The foundation of the global economy

The US dollar is considered a “bedrock of the global economy” and a “reserve currency for international trade and finance,” according to analysts.

“The dollar is rising due to an increase in interest rates in the US, ” remarked Samiullah Tariq, Head of Research at Pakistan-Kuwait Investment Company.

He pointed out that it has gained against the Indian rupee and the Japanese yen. “Against a basket of currencies, it’s at a 20-year high,” he said.

“Other currencies are more exposed to US dollar and the global economy because of their trade as compared to Pakistan.” Alpha Beta Core CEO Khurram Schehzad stated.

When the Fed dropped interest rates, other countries saw larger inflows, according to the analyst. When the Fed raises interest rates on the dollar, the opposite happens.

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“Pakistan is less exposed,” he said, “but homegrown political issues have filled the gap and affected the local currency.”

It’s worth noting that, like any other fiat currency, the dollar’s relative value is determined by the United States’ economic activity and outlook.

The US dollar rises due to a number of causes, the most important of which is the demand for the currency. The value of the dollar rises in tandem with the demand for it. In contrast, if demand falls, so does the value.

Inflation rates, trade deficits, and political stability are all factors that determine whether the dollar appreciates in value against other currencies.

Currency reserve status, inflation, political stability, interest rates, speculation, trade deficits/surpluses, and public debt are all factors that impact currency exchange rates.

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