The performance of a currency, good or bad, boils down to the fact that most major economies follow a floating exchange rate system. A variety of global and local factors influence the performance of a currency. Since the exchange rate is the comparative demand of one currency against another, these factors ensure that the currency value remains dynamic.
Some of the best performing currencies during this year are mentioned below, along with the factors that may have fuelled currency exchange rates and decided which currency is performing best.
The Indian rupee started the year at 69.6 per US dollar, which was a marked improvement from last year’s low of around 74 per USD. It went back to 71 during early February, but has meandered between 68 and 70 since then.
The rupee appreciated in March, as it traditionally does due to higher flows in the market. It also appreciated sharply after the India-Pakistan skirmish, which was swept aside through diplomacy. Foreign institutional investors have also shown positivity, which further strengthened the rupee.
The rupee is also undergoing market correction this year for its earlier underperformances.
After slipping to the wrong side of 50 per USD in late 2016, the peso has never dropped back below it, except for a blink-and-miss moment in January 2018. However, since October last year, it has been consistently improving and has a realistic chance to position itself at a sub-50 exchange rate against the USD.
There have been positive sentiments from US earnings and the renewed trade negotiations between China and the USA. Being an emerging economy with close ties to both global powerhouses, it is not surprising that the Philippine peso is quite sensitive to such developments.
The peso’s appreciation can also be attributed to the fact that businesses and traders are more willing to trade US dollars and other currencies in favour of owning the peso, making it stronger in the exchange market.
In recent years, the Japanese yen has been the strongest between the years 2010-12 when it fluctuated between 75 and 85 per USD. Since touching a weak 114 last October, the yen has strengthened and has been hovering at 107-108 over the past months.
The stature of the yen as a safe haven among risk-averse investors cannot be underestimated. This explains its stability despite decades of negative rates, deflation and a stagnating economy. The pivot behind this is liquidity and with its positive current account balance, Japan can attract liquidity in spite of sluggish domestic fundamentals.
The rouble is nowhere near the 30-40 units per USD that it used to be but since its fall into the 80+ value in early 2016, it has been on an improving track. It has continued to strengthen since the beginning of 2019, from 70 to around 63 per USD.
Experts have linked the recent strong performance of the rouble to the fact that money hasn’t flowed into the US from emerging economies, as expected. This has, in turn, strengthened the rouble against the USD. Prices in the Russian share market are rising and generating excellent returns on investment.
Traditionally, oil prices have had a strong influence on the Russian economy and the rebound of oil prices have contributed to the strengthening of the rouble in recent times. It is also possible that the rouble is correcting itself after the restrictions imposed last year by the US on several influential Russian businesses.
Egyptian Pound (EGP)
This is another currency that has maintained consistency in recent times, staying between 17 and 18 per USD during the last two years. This year it has been consistently strengthening to maintain an exchange rate below 17, its best position since March 2017.
Behind this rally, an increase in the foreign fund inflow into Egypt was observed. The decision of the Central Bank of Egypt to terminate the foreign investor funds repatriation mechanism has ensured that inflow is reflected in the interbank liquidity and the movement of the EGP.
Domestic performance has also fuelled this improvement – in areas such as tourism, natural gas production, and exports. An increase in inward remittances has contributed to further strengthening of the Egyptian pound.
The US dollar has been one of the best performing currencies this year, at a gradual but consistent pace. When pitted against the euro, we see that the USD presently stands marginally below it at 1.1 per euro. This is a strong comeback from the 1.4 value of five years ago. Of course, both being strong currencies, we can’t expect wild fluctuations in their comparative exchange rates.
The US Federal Reserve rate has continued to rise against a perfectly immobile European rate. The increase in the interest rate differential between the US and other countries has put the dollar in a stronger position. The slowdown in the Chinese market has also contributed to making the dollar look stronger.
At the same time, it is important to note that this slowdown is not likely to hit the US in the long run – at least not in a way that could impact emerging economies. Like always, a robust domestic economy is the constant behind a strong US dollar.
Effects of Currency Performance
The effects of currency performance globally will depend on the influence of the currency on the global economy. Fluctuation in influential currencies like the USD has larger ramifications than currencies of underdeveloped or developing economies. At an individual level, changes in currency transfer rates can affect a person’s foreign travel and overseas procurement plans. Besides, expats will wonder how to transfer currency when their home currency is getting stronger.
At a more macro level, a weakening currency can improve exports as the purchasing power of the importing nation improves. Conversely, the exports of a country with an improving currency can actually have a negative impact. This has been recently observed in the US, where major companies posted reduced profits in the wake of a strong dollar performance.
China, on the other hand, holds its currency on a strict leash to keep it undervalued. This has helped the nation to propel its exports, backed by an undervalued currency. Having the best performing currency encourages foreign investors to invest in that country, as there’s a lower risk of exchange losses.
Oil price is an important factor in currency exchange rates. The exchange value of the USD is traditionally regarded as the factor that dictates oil prices, and vice versa. However, between oil price and USD, it is usually the former that seems to have a more dominant position.