What is happening to the major world currencies?

Rarely have the world's major currencies followed different paths, but while the Japanese yen and the Chinese yuan fell against the dollar, the euro and the British pound rose.

And with the divergence of expectations related to economic and monetary policies, the lack of consistency in the movement of currencies increased, which made the global currency trading market - worth $ 7.5 trillion per day - more volatile and more difficult to predict, while it operates in conditions after the Covid-19 pandemic and during the war in Ukraine in light of the global energy crisis.

“It used to be that if you knew the direction of the euro and the dollar correctly, you had a good chance of correctly forecasting everything else, but now it's a little bit more difficult … you have to do your homework, and the spreads between currencies are widening,” said Jordan Rochester, foreign exchange strategist at Nomura. ".

Last year alone, the euro fell to its lowest level in 20 years against the dollar, the pound sterling fell to its lowest level ever, and the yen fell to its lowest level in 32 years, but the dollar witnessed a sharp increase due to a large increase in US interest rates to control inflation. This is what other major central banks have not begun to implement at the same speed.

The Bank of Japan bucked expectations that it would change its ultra-loose monetary policy in early 2023, which led to the yen falling 9% so far this year, adding to its 12% decline in 2022. This raised the possibility of intervention to support the currency.

The yuan - which is trading near its lowest level in 7 months - is also expected to fall further, as are other smaller Asian currencies.

Different paths in 2023

Meanwhile, the euro rose 2.5% this month against the dollar, and is expected to rise further as the European Central Bank pursues monetary tightening.

The pound has also risen more than 5% so far this year, making it on course for the biggest one-year rally since 2017.

Rochester said Nomura expects the euro to move to 1.12 against the dollar over the coming months, which means an increase of another 2% from 1.095 against the dollar now, and expects the yuan to fall to 7.30 versus 7.2 against the dollar now.

The yuan has fallen nearly 5% this year, hit by a weak economy and a wide interest rate gap with the United States.

This week, Chinese authorities set a stronger-than-expected trading range for the currency, in a sign that Beijing is uncomfortable with the yuan's rapid depreciation.

Lee Hardman, an exchange market analyst at Mitsubishi UFJ Financial Services, said that the dollar's recovery against Asian currencies reflects a shift in a trading path that existed late last year with the reopening of the Chinese economy, after growing pessimism about growth prospects there.

"However, the dollar's performance is not as strong against other currencies as it continues to decline against some European currencies, as well as Latin American currencies," he said.

However, he pointed out that the trend of market fluctuations towards a slowdown compared to previous years will lead to an increase in the focus of investors on weighting trades in pursuit of profit by exploiting the differences in interest rates and the divergence of monetary policies between central banks.

Multilevel crisis

For his part, Kate Jokes, head of currency strategy at Societe Generale, believes that the focus on monetary policy divergences is also a result of uncertainty in other areas.

"What amazes me about the currency markets right now is that they are more sensitive to short-term interest rates than I can remember," he said.

Lee Hardman, an exchange market analyst at Mitsubishi UFJ Financial Services, said that the dollar's recovery against Asian currencies reflects a shift in a trading path that existed late last year with the reopening of the Chinese economy, after growing pessimism about growth prospects there.

"However, the dollar's performance is not as strong against other currencies as it continues to decline against some European currencies, as well as Latin American currencies," he said.

However, he pointed out that the trend of market fluctuations towards a slowdown compared to previous years will lead to an increase in the focus of investors on weighting trades in pursuit of profit by exploiting the differences in interest rates and the divergence of monetary policies between central banks.

Multilevel crisis

For his part, Kate Jokes, head of currency strategy at Societe Generale, believes that the focus on monetary policy divergences is also a result of uncertainty in other areas.

"What amazes me about the currency markets right now is that they are more sensitive to short-term interest rates than I can remember," he said.

In the Nordic countries, the Norwegian krone is under pressure, and real estate problems and a weak economy are also hurting the Swedish krona, which last week hit a record low against the euro, amid a feeling that interest rates in the country cannot rise much from their current level.

But given what the world has witnessed in the past few years, it is perhaps not surprising that the currency markets are moving in an unusual way

thing.

"We have witnessed a combination of a pandemic that only occurs once every 100 years, a war that only occurs once every 75 years, and an energy crisis that only occurs once every 25 years... You have to be 120 years old, for example, to be able to absorb something like this," Jukes said.