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Currencies

The United States' "Monitoring List" of Major Trading Partners

2024-11-15

The United States has taken a significant step by adding South Korea to its "monitoring list" of major trading partners. This move comes as part of the Treasury Department's semi-annual report, which examines countries with large trade surpluses and active foreign exchange market interventions. According to the report released on Thursday, no major US trading partner was found to have manipulated its exchange rate in the four quarters through June 2024. However, several economies made the list, including China, Japan, Taiwan, Singapore, Vietnam, and Germany. Among them, Japan, South Korea, Taiwan, Vietnam, and Germany met two of the three criteria for enhanced analysis, namely having a significant bilateral trade surplus with the US and a material current account surplus. Singapore was noted for its persistent, one-sided foreign exchange intervention. Malaysia, which was previously on the list, has now been removed. The Treasury Department cited China's "failure to publish foreign exchange intervention and broader lack of transparency around key features of its exchange rate mechanism" as a reason for keeping it on the list. Secretary Janet Yellen emphasized that the Treasury firmly advocates for major trading partners to adopt policies that support strong, sustainable, and balanced global growth and reduce excessive external imbalances. This move by the US has significant implications for international trade and the global economic landscape.

Implications and Analysis

The addition of South Korea to the "monitoring list" is a clear signal that the US is closely watching the currency practices of its major trading partners. This action is part of the US government's efforts to address trade imbalances and ensure fair competition in the global marketplace. By closely monitoring these countries' exchange rate policies, the US hopes to prevent unfair advantages and promote more balanced economic growth.For China, being on the list highlights the ongoing tensions between the two economic giants. The lack of transparency in China's exchange rate mechanism has been a point of contention, and the US is pushing for greater openness and accountability. This could lead to further discussions and potential policy changes on both sides.Japan, South Korea, Taiwan, Vietnam, and Germany also face increased scrutiny due to their trade surpluses and exchange rate policies. These economies will need to carefully navigate the US's monitoring and ensure that their policies do not lead to further trade disputes.In conclusion, the US' "monitoring list" is a tool for addressing global economic imbalances and promoting fair trade. It remains to be seen how these countries will respond and what impact this will have on the future of international trade.

On Monday, the British pound maintained its stability against the US dollar, trading at $1.2619. This came after a significant drop on Friday, which led it to reach its lowest level in four months. The pound's slight recovery was underpinned by a weaker dollar, as the post-election rally in US markets began to lose steam.

Short-Lived Resilience and Inflation Concerns

Although the pound has shown some resilience recently, it may not last long. Investors are preparing for the release of the UK's latest inflation figures later this week. If inflation remains high, it could raise concerns about the Bank of England's tightening policy, which might have a negative impact on the currency.Against the euro (GBPEUR=X), sterling remained flat, trading at €1.1968. Jane Foley, senior FX strategist at Rabobank, stated, "The pound continues to hold its own vs. the EUR. We still expect that EUR/GBP is likely to edge to the 0.8150 level over a 12-month period."The euro is also facing challenges. Political uncertainty in Germany and concerns about US tariffs under the next Trump administration are weighing on the single currency. Additionally, if UK inflation and upcoming PMI data fail to meet market expectations, the pound's prospects against the euro could face new difficulties.

Gold Prices and the Dollar's Rally

On Monday, gold prices experienced a modest increase after a sharp decline last week. This was due to the faltering of the US dollar's recent rally. Traders are now looking forward to remarks from Federal Reserve officials later this week to gain more insights into the US interest rate outlook.Spot gold rose slightly by 0.1% to $2,588.28 per ounce, while US gold futures edged 0.6% higher to $2,586.30 at the time of writing. The US dollar index (DX-Y.NYB), which surged 1.6% last week, pulled back slightly, reducing the pressure on gold. A weaker dollar makes gold more affordable for holders of other currencies, thereby boosting the demand for the precious metal.However, gold prices have struggled to break through the key $2,600 level since last week. Market participants are factoring in expectations of a more cautious approach by the Federal Reserve in cutting interest rates.After a strong rally over the past year, gold gained nearly 30% in value and reached an all-time high of $2,790.15 in late October. During this period, investors sought safe-haven assets due to global economic uncertainties.

Oil Prices and Global Market Trends

During early European trading, oil prices were slightly lower. Concerns about slowing fuel demand in China and a projected global oil surplus limited the previous gains achieved over the weekend. The conflict in Ukraine escalated, with Russia launching its most extensive airstrike on Ukraine in nearly three months. This attack caused significant damage to Ukraine's power infrastructure, increasing geopolitical uncertainty and drawing attention to potential disruptions in global energy markets.However, these concerns were mitigated by ongoing worries about China's economic slowdown. Recent data from the world's largest oil importer showed a 4.6% drop in refinery throughput in October compared to the same month last year. Factory output in China also grew at a slower pace, dampening expectations for a strong recovery in fuel demand.The global oil market is also being weighed down by forecasts from the International Energy Agency (IEA). Last week, the IEA warned that global oil supply could exceed demand by more than 1 million barrels per day by 2025, even if OPEC+ maintains its current production cuts. This projection, combined with weak data from China, led to a more than 3% decline in both Brent and WTI prices last week.

The FTSE 100 and Market Performance

The FTSE 100 (^FTSE) opened higher, climbing 0.2% to 8,075 points. For more detailed information, please check our live coverage here. You can also download the Yahoo Finance app, which is available for both Apple and Android devices.

Recent currency fluctuations in the developing world have sparked significant discussions among investors. Pacific Investment Management Co., a major player in the emerging-market arena, is among those questioning the efficiency of a floating exchange rate system. Pramol Dhawan, the head of the EM team at this $2 trillion asset manager, has pointed out that the extreme swings in currencies such as the Mexican peso and Brazilian real have emerged as obstacles to investment. On the contrary, countries like Egypt, Nigeria, and the Dominican Republic, which maintain a controlled FX policy, have gained more attention. "It's not straightforward to me that fully... (full story)"

Unraveling the Impact of Currency Volatility on Investment

Currency Volatility in the Developing World

In recent times, the developing world has witnessed a series of currency bouts that have sent shockwaves through the global financial markets. These fluctuations have not only affected the economies of these countries but have also caught the attention of large investors like Pacific Investment Management Co. The Mexican peso and Brazilian real, in particular, have experienced extreme swings, making it challenging for investors to navigate the market. Such volatility can lead to increased risks and uncertainties, which can have a significant impact on investment decisions.

The Perspective of Pacific Investment Management Co.

Pramol Dhawan, with his extensive experience in the emerging-market space, has voiced concerns about the current state of currency volatility. As the head of the EM team at a $2 trillion asset manager, he understands the importance of stable currencies for investment purposes. The high swings in currencies like the Mexican peso and Brazilian real have made it difficult for the firm to achieve its investment goals. This has led them to question the effectiveness of the floating exchange rate regime and explore other options.

Countries with Controlled FX Policies

Countries like Egypt, Nigeria, and the Dominican Republic have adopted a controlled FX policy, which has made them more attractive to investors. These policies help to stabilize the currency and reduce volatility, providing a more predictable environment for investment. By keeping a close eye on the exchange rate and implementing measures to control it, these countries have been able to attract foreign investment and promote economic growth. This approach has shown promising results and has led to increased interest from investors looking for stable investment opportunities.