Only four currencies resist against the dollar so far this year

So far in 2022, only four currencies in the world have strengthened against the dollar. These are the ruble, the real, the Mexican peso, and the Peruvian sol, in that order. The rest has depreciated. Measured by the Dollar Index (DXY), the greenback is at its highest level in two decades against other reference currencies such as the euro, the yen and the pound sterling.

The DXY, which measures its strength against a basket of six advanced economy currencies, has gained 17% so far this year.

“There is a common element in the weakness of the currencies against the dollar and it has to do with the tightening of the monetary policy of the Federal Reserve (Fed) of the United States and, due to its messages with which it is expected to maintain the interest rate at high levels until inflation is controlled, even if that means a recession,” said James Salazar, deputy director of Economic Analysis at CIBanco.

Janneth Quiroz, deputy director of Analysis at Monex Casa de Bolsa, said that in general terms, the dollar has presented gains against the other currencies except for four, which is explained by the increases in the interest rate in the United States and by the expectation that it will continue to increase.

“The fact that the risk-free rate is more attractive means that a greater number of investors are interested in investing in the new debt that is being issued because it will pay a higher yield than it did a few months ago,” explained the specialist.

Added to this is the uncertainty about the implications of a higher cost of borrowing, especially in emerging countries.

The euro lost against the dollar and is worth less for the first time since 2002. Its depreciation is 16.34% in the annual accumulated. The pound sterling registers the biggest drop since 1985, with a loss of 19.43%, to 0.8826 units per dollar.

Another strong DXY currency is the yen which is at its lowest level against the dollar since 1998, losing 27.89% of its value.

The most depreciated currencies are the Argentine peso (-47.35%), the Turkish lira (-39.34%) and the Swedish krona (-24.30). On the other hand, the dollar has depreciated against the ruble (14.77%), the real (5.55%), the Mexican peso (2.56%) and the Peruvian sol (0.62%).

Janneth Quiroz explained that other factors that support the strength of the dollar is the size of the US economy, which is the largest in the world; In addition, its financial market is the most developed.

“The market knows that if the US economy slows down further, there will be mechanisms to reverse any type of imbalance,” he said.

A more expensive dollar is not very positive, in fundamental terms, the specialists pointed out, because it makes it more expensive to acquire or import goods from the United States. This also causes higher inflationary pressures.

Country-specific issues

Analysts explained that the weakness of the currencies also responds to internal issues of each country.

In the case of the euro, said Janneth Quiroz, Europe is in trouble because of the war between Russia and Ukraine that led to historic increases in energy prices, which has a negative impact on the economy.

In the UK, with the change of government there is uncertainty about what will happen to the proposed program of tax cuts.

Japan, a destination that becomes attractive in times of uncertainty, loses value of its currency due to the fact that its interest rate remains unchanged, at -0.10% since 2016, while inflation reached levels of 2.8% in August compared to the same period in 2021.

For James Salazar, the weakness of the euro is explained by the fact that Europe is more likely to fall into recession and, in relative terms, the European Central Bank is raising its interest rate at a slower pace.

Janneth Quiroz believed that there will be a strong dollar for several months to come or, at least, until the interest rate in the United States stops rising. The projection is that it reaches a range of 4.75%, according to the latest Fed projections for September.

winning weight

The Mexican peso distinguished itself as the third most successful currency against its US pair and accumulates an appreciation of 2.56% in this 2022, trading at 19.9815 units per greenback.

The resilience that the Mexican currency has shown is supported by the monetary policy of the Bank of Mexico (Banxico), since the 600 base point differential between the United States interest rate (which is located in a range of 3 to 3.25%) and Mexico (9.25%) helps, among other points, to prevent capital flight.

In addition, they supported the strength of the peso against the dollar, exports, the large increase in remittances from Mexicans, remittances and tourism.

The ruble has taken advantage against the dollar due to the increase in energy prices, which has caused Russia’s current account to be in surplus, leaving a significant spill of dollars.

Brazil’s currency, the second most appreciated against the dollar, like Mexico, has benefited from the fact that the local central bank has anticipated the Fed and maintained a higher interest rate, at 13.75 percent.

judith.santiago@eleconomista.mx