Is the USD the ? Bruce almighty” of all currencies ?

Is the USD the ??Bruce almighty” of all currencies??

Is the dollar the all-powerful currency that puts all other currencies under pressure? One might think so, as it is so incredibly strong. This strong rise in the USD is fueling fears of a new currency war... Yet isn't the fight against inflation alone a cliff to climb? The bullish Dollar is blowing an additional inflationary wind. Hasn't the world entered a spiral of rate hikes and buybacks to support currencies? Isn't this a game from which no one can win?

Eternal recommencement

After having returned to the inflationary peaks that we experienced, for the most part, in the 1980s, we are now once again suffering the destructive force of the almighty US Dollar. Don't we talk about "The dollar is our currency, but your problem", a famous slogan of the 70's? The dollar is causing headaches for bankers (central and others). The paradox is that the so-called hard currencies, e.g., JPY, EUR, GBP... have seen their value fall even more against the USD than the currencies of emerging countries. The Brazilian Real has even gained value against the USD since the beginning of the year. The US rate hike launched to control the galloping US inflation is launched since the end of 2021. The higher cost of money is basically cooling the economy and curbing inflation. Capital flows to the US are launched. The US FED is more aggressive in raising its key interest rates, creating a wider interest rate differential. One EUR is not even worth one USD anymore. Despite a rise in EUR rates, a lower interest rate differential, there are other reasons that push the Dollar to the top.

Safe haven

The dollar is fully playing its role as a refuge currency. Better growth prospects in America are providing additional support for the USD. The JPY and GBP are not doing much better. Zero interest rates for the Japanese and an announcement of a British tax cut are enough to weaken these two currencies. Only the Swiss Franc, another safe haven, is doing well, without the Swiss economy justifying it and without any fossil fuel extracted from their soil. The danger is that a systematic and global rise in interest rates will suffocate the world economy and cause a deep recession. There is already talk about a real change of cycle (end of the current one), with all that this entails. The scenario of a "reverse" currency war (since countries usually lower their currencies to be more competitive). Today, we are threatened by a possible race to support currencies to slow down inflation, and growth, at the expense of inflation in other countries. We can conclude that the US is exporting part of its inflation problem to the rest of the world. The little games between countries have started again and it is every country for itself.

Hyper volatility requiring better management of foreign exchange risk

FX volatility is soaring. Companies are getting a taste of it. They must review their FX hedging strategies. This is a point where many can seek value and protect business margins weakened by the crisis. It seems to me that more than ever, it is a wise advice to think about revisiting one's hedging policy and especially the means to do so. Automate what is possible and what is not to cover each risk, however small, individually, to preserve, in these troubled times, the low operating margins. We can only encourage the implementation of Currency Management Automation (i.e. CMA) solutions, which have often been discussed, as they are virtuous and beneficial in every way.

Protecting the dollar, the Fed’s role, isn’t it?

The Fed must preserve its dollar and look after the interest of its country, but by its role, acting in this way has impacts on the rest of the world, and it cannot ignore it, because it has consequences for the USA. At a certain level, the price of the dollar can weigh on its economy. It seems to me that as long as its inflation is not under control, it will not be able to act at the international level. We are still far from a "Plaza" type agreement in 1975. But when will we see a "Plaza II"? It would only take a little for the undervalued EUR to strengthen... but as long as the energy crisis is brewing, this is unthinkable. The difference with the past is the good but relative resistance of the emerging countries, except for Turkey, Sri Lanka and Venezuela (but there the reasons are linked to their disastrous internal policies). And what about China? It resists by its size and strength, despite a colossal real estate crisis. The Yuan is at its lowest level since 2008. We do not know what will happen to the currencies and their respective values. But we believe, as treasurers, that the FX world will remain hyper-volatile for some time to come and not being properly equipped would be like crossing the Arctic in a T-shirt.

Fran?ois Masquelier, CEO of Simply Treasury Luxembourg October 2022

Disclaimer: This article was prepared by Fran?ois Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT).