Connect with us

Business

How a strong US dollar is endangering other currencies

Published

on

NEW YORK: The dazzling rise of the US dollar, which has hit one record after another, is raising fears of a currency crash of a severity not seen since the 1997 Asian financial crisis reverberated around the world.

The Federal Reserve’s rapid, steep interest rate increases and the relative health of the US economy has caused investors to flood into the dollar, driving the greenback up and sending the British pound, Indian rupee, Egyptian pound and South Korean won, and others to uncharted depths.

“The moves are definitely getting extreme,” said Brad Bechtel of Jefferies, warning that the exchange rates could fall further creating a “dire situation.”

Most other major central banks also are forcefully tightening monetary policy to bring down inflation, but so far the moves have not helped stabilised the currency market, nor has Japan’s direct intervention to support the yen last week.

Many fear that the same will be the case with the Bank of England’s plan announced Wednesday to conduct emergency purchases of government bonds to support the pound.

“We have our doubts that the BoE’s plan will be the silver bullet to kill all of the angst that has been pressuring the pound […] considering its plan doesn’t have permanency,” said Patrick O’Hare of Briefing.com.

Others, especially emerging market countries, are even worse off. The Pakistani rupee has lost 29 percent of its value against the US dollar in the past year, and the Egyptian pound has weakened by 20 percent.

Those countries, and others like Sri Lanka and Bangladesh which “benefitted from cheap and plentiful liquidity,” when interest rates were low during the pandemic, “are all suffering from tighter global liquidity,” said Win Thin, head of currency strategy at BBH Investor Services.

“Those countries with the weakest fundamentals are likely to be tested first but others may join them,” he warned.

Those countries rely on imported oil and grain which have seen prices soar, widening their trade deficits and fueling inflation, massive blows to their currencies.

The appreciation of the US currency has exacerbated the problem, since many commodities are denominated in dollars.

Already in a fragile position, Pakistan was hit with historic flooding in August, which prompted the government to discuss a restructuring of its debt.

“There are severe pressures on the financial system now. And it’s only a matter of time until there’s a larger crisis somewhere in the world,” warns Adam Button of ForexLive.

Bad memories

US Treasury Secretary Janet Yellen earlier this week said she has not yet seen signs of “disorderly” financial market developments amid the interest rate hikes.

For countries like Taiwan, Thailand, or South Korea, which also dependent on energy imports, China’s zero-COVID policy has caused their exports to this key trading partner to plummet.

Larger economies like China and Japan have contributed in recent weeks to the turbulence on the foreign exchange market. The Japanese yen plunged its lowest level in 24 years, while the Chinese yuan hit its weakest in 14 years.

Fear of destabilisation brings back memories of the 1997 Asian financial crisis, which was triggered by the devaluation of the Thai baht.

Malaysia, the Philippines, and Indonesia followed, which panicked foreign investors and led to massive outflows of capital, pushing several countries into a severe recession and South Korea to the brink of default.

At the time, the collapse of the baht was in part linked to its fixed parity with the dollar, which forced the Thai government to support its currency, depleting its foreign exchange reserves, which was unsustainable in the face of market forces.

Argentina eventually was forced to abandon its peg to the dollar and defaulted in late 2001 — the largest sovereign default in history.

Erik Nelson of Wells Fargo said that is a key difference between 2022 and 1997.

“Now there’s not a lot of fixed exchange rates,” he said. “I’m frankly more worried about developed markets right now.”

Lebanon, one of the few to still peg its currency to the greenback, on Thursday announced a drastic devaluation, taking the country’s pound to 15,000 to the dollar from the previous fixed value of 1,507.

In the United States, by contrast, where inflation has soared to a 40-year high “the Fed sees strong dollar as a blessing,” said Christopher Vecchio of DailyFX, noting that it helps “insulate the economy from more significant price pressures.”‘

A strong currency means the country pays less for its imported products.

Business

Over 600 points are added by PSX in intraday trading.

Published

on

By

Tuesday’s lunchtime trading on the Pakistan Stock Exchange saw favorable activity.

During intraday trading, the benchmark KSE-100 Index increased by 672.08 points, or 1.11%, and was trading at 61131.82 levels.

The KSE-30 Index was trading at 20,558.31 after adding 211.46 points, or 1.04%.

The Pakistan Muslim League-Nawaz (PML-N) and the Pakistan Peoples’ Party (PPP) had another round of discussions for the establishment of a central government the day before the rally in the local stock exchange.

In the meanwhile, Fitch Ratings has issued a warning, stating that the likelihood of default would rise in the event of a drawn-out discussion or the inability to reach an agreement with the International Monetary Fund (IMF).

According to the State Bank of Pakistan, which reported net foreign reserves of $8 billion as of February 9, 2024, up from a low of $2.9 billion on February 3, 2023, Pakistan’s external situation has improved recently.

Continue Reading

Business

The smartphone app “Tajir Dost” to tax Pakistani businesses is anticipated to launch on February 22.

Published

on

By

The sources stated that the caretaker administration aims to include 3.5 million shops in the tax net by use of the “Tajir Dost” app.

They said that Anwaar-ul-Haq Kakar, the acting prime minister, has instructed the relevant authorities to conclude their engagement with the retailing bodies within a few days.

The introduction of the “Tajir Dost” smartphone app to impose taxes on several merchants was authorized earlier this month by the acting federal administration.

The smartphone application, created by Pakistan Revenue Authority Limited (PRAL), a division of the Federal Board of Revenue (FBR), is intended to serve as a registration tool for shops and dealers throughout the nation.

The app’s database will be updated with the traders’ information who have already registered with the FBR.

Previously, in December 2023, the Federal Board of Revenue (FBR) made history by collecting Rs1.021 trillion. After deducting refunds of Rs 38 billion that were given out that month, the FBR’s net collection increased to Rs 984 billion.

Continue Reading

Business

SBP confirms the choice to use new currency notes was not influenced by the IMF.

Published

on

By

In response to recent rumours, Saleem Ullah, the deputy governor of the State Bank of Pakistan (SBP), said on Thursday that the International Monetary Fund (IMF) had no influence over the decision to release new currency notes.

Saleem Ullah underlined in an interview that printing new notes is a regular procedure carried out every 15 to 20 years to maintain the currency’s integrity.

He stressed that, in contrast to rumours, the deficit is expected to decline in the next fiscal year, in line with the goals of the new monetary policy.

“Every 15 to 20 years, new notes are printed,” he clarified. The new currency’s goal is to keep the note’s integrity intact.”

The SBP assured the public earlier this week that the current banknote series will continue to be in circulation despite the introduction of new currency notes, which it intended to implement over the course of the next two years.

Regarding the latest series of currency notes, the deputy governor clarified that they were launched in 2005 and were in circulation for three years.

He admitted that the procedure was time-consuming and estimated that because of the careful preparation required, it would take around two years to issue the first note.

In addition, he guaranteed that the new banknotes will have improved security measures because they would be made using contemporary technology. He gave information regarding the SBP’s effort to get public feedback on the new currency notes’ design, highlighting the fact that recommendations were being actively sought from the populace.

“There are three prizes for each denomination, and there are a total of seven denominations, hence 21 prizes,” he disclosed, highlighting the process’ openness. First place is worth Rs 1 million, second place is worth Rs 500,000, and third place is worth Rs 300,000.

Continue Reading

Trending