Currency Exchange Rates

Pay attention: this is the most important macro chart in the world. Foreign Central Banks have been sending a clear message to US policymakers: we intend to diversify away from the US Dollar. The chart below shows the % of total foreign exchange reserves held in USD (blue), EUR (white) and gold (orange). There seems to be an already ongoing diversification away from USD as the key currency for FX reserves into other alternatives – primarily into gold. But why, and should you be worried about it? 1️⃣ The weaponization of Russian USD FX reserves woke up several other Central Banks to the reality - reserves invested in USD assets are your assets only until the US says so, otherwise they are gone; 2️⃣ The Trump administration intends to change the global trade system, and policies like tariffs reduce the appeal of US assets. For decades, we lived in a world where foreign countries exported into a strong US consumer economy, and recycled back the proceeds into US assets - often T-Bills and US Treasuries. Some countries like Norway or Switzerland went as far as deploying their USD reserves into US equities: decision which led the Norwegian Sovereign Wealth Fund to deliver strong returns. But recently the winds have changed. Global Central Banks are rapidly diversifying their FX reserve buffers away from the USD and into Gold. And the EUR could be a winner too. Now that Germany and Europe have opened up their fiscal purse, there will be much more AAA-rated EUR bonds where foreign investors can park their excess reserves. Couple that with a growth impulse from fiscal spending, and more capital could flow towards Europe. In any case, this is a crucial macro trend to watch. Agree or disagree? 👉 If you enjoyed this post, follow me (Alfonso Peccatiello) to make sure you don't miss my daily dose of macro analysis.

How much should you be earning if you move to the US, UK or UAE to maintain the same standard of living that you have in India? I have a basic thumb rule called 4-3-2 that I use for a quick calculation... and here's explaining it. It's a well established fact that someone earning USD 100k in the US is not living a lifestyle similar to someone earning Rs 85 Lakhs in India. The Indian guy would have a much better lifestyle with that money in India because cost of living is substantially lower. Thus, to equate both currencies across geographies from a cost of living perspective, instead of using the foreign exchange rate for conversion, we use the PPP factor or the Purchasing Power Parity. 👉🏼 For USA, the PPP factor with respect to INR is ~22. This means USD 100k = INR 22L in purchasing power, and not INR 85L 👉🏼 For UK, the PPP factor w.r.t INR is ~35. This means GBP 100k = INR 35L in purchasing power, and not INR 1 crore 👉🏼 For UAE, the PPP value of AED 100k = INR 10L and not INR 23L 👉🏼 So, to get purchasing power equivalent for India, divide your INR forex rate based US salary by 4, UK salary by 3, and UAE salary by 2. 👉🏼 All these countries have different tax rates, so please only compare post tax incomes. Also know that such PPP indices are built based on the costs for an entire country. Thus, when you take cost of living of specific cities into account, there would be differences... but it's a general benchmark for the entire economy. A hammer used to flatten pizza dough may give you the desired result, but may not always be advisable. So, remember this does not take into account the value you ascribe to living close to family, air quality, absolute savings, etc... so use that in your own context. Your life's priorities are not everyone else's priorities. #casarthakahuja #ppp #economics #usa #uk #india #uae

In today's Business Standard , Arvind Subramanian, Josh Felman, and I discuss the implications of a significant shift in Reserve Bank of India (RBI)'s exchange rate policy. Although not formally announced, the RBI has effectively pegged the rupee to the dollar since late 2022. Maintaining this peg has come at a steep cost—approximately $200 billion in forex interventions over two and a half years, including $100 billion since September through spot and forward markets. Such a strategy, however, is not without risks. Exchange rate pegs tend to erode competitiveness and bind monetary policy to defending the currency rather than addressing domestic economic priorities. These vulnerabilities leave the rupee exposed. Should markets perceive it as overvalued or anticipate a shift in monetary focus, speculative pressures could mount, forcing a disruptive adjustment. The prudent course for the RBI is to allow a gradual depreciation of the rupee, bringing it closer to equilibrium value. This would free monetary policy to focus on pressing domestic needs while safeguarding India's hard-earned reputation for prudent macroeconomic management. Link to the article: https://lnkd.in/gU-uyqzR

I'm being asked why the US broke a decade-plus policy of not interfering with the market-setting of exchange rates. I suspect the drivers include: Trade Competitiveness: Washington sees an excessively weak yen as a drag on American trade competitiveness, not just in bilateral trade with Japan but also in third markets across the globe. Yield Concerns: In past solo interventions, Tokyo has tended to fund its yen purchases by selling US Treasuries, a move that inadvertently pushes bond yields higher and drives up domestic borrowing costs for the American government, companies, and households. The upside for both countries is clear: This type of joint intervention carries a lot more weight, and markets are paying attention, at least initially. The catch for the US? Washington has now signed onto a strategy whose ultimate success doesn't rest in its own hands. Instead, as discussed in previous posts, it hinges on a comprehensive policy alignment in Tokyo among the Bank of Japan, the Ministry of Finance, and the Prime Minister’s Office. #economy #markets #japan #yen #currency #intervention #fx

In my latest @bsindia piece, following an Indianomics discussion with Latha Venkatesh and Mridul Saggar, I argue that while articulating India’s growth story is critical, policy and market distortions may also have amplified negative sentiment around the INR and deterred capital flows. Key points: • No cause for panic: INR weakness warrants attention, but India’s external deficits remain manageable and RBI buffers are substantial. • The deeper issue: India’s prolonged struggle to attract sustained net foreign capital amid persistent negative sentiment on the rupee. • Policy silos: Interest rates, liquidity, taxation, capital flows, and currency markets are deeply interconnected, though policy debates often treat them in silos. • Unintended consequences: Interventions to suppress interest rates, alongside tax frictions, may have unintentionally weakened capital inflows and lowered the cost of speculative positioning against the rupee. • Distorted savings: Distortions in taxation and markets have also stunted debt market development, pushing discretionary savings disproportionately into equities. • Navigating the Trinity: The answer is not avoiding intervention, but engaging more holistically with the “impossible trinity” linking interest rates, exchange rates, and capital flows. • The structural fix: Rather than introducing capital controls or fresh distortions, policy should focus on deeper debt markets, balanced taxation, and a globally competitive framework for foreign capital. The piece argues against both panic and rigid orthodoxy, in favour of a more integrated approach to monetary, currency, and fiscal policy. Read here: https://bit.ly/4tWs8Fi

THE MOST IMPORTANT STORY THIS WEEK WASN'T LEOPOLD'S HEDGE FUND. IT WAS THE US AND JAPAN STEPPING IN TO DEFEND THE YEN. Here's a recap. Thursday, the Bank of Japan kept interest rates unchanged. But it did something far more significant: it intervened in the currency market, buying yen to halt its slide. Then came the real surprise. The US Treasury also bought Japanese yen, marking the first coordinated support in decades. Why does this matter? Because Japan is the largest foreign holder of US Treasuries, and the yen carry trade has been one of the biggest sources of liquidity for global markets for decades. Investors borrowed yen at ultra-low rates, converted it into dollars, and poured the money into US assets—from Treasuries to technology stocks and AI. That trade is now under pressure. Japan had already spent roughly $74 billion defending its currency this year, with little success. The yen still fell to its weakest level since 1986. This week, coordinated intervention changed the picture. The yen surged about 4% in just two days. Moves of that magnitude rarely happen without forced positioning. If the carry trade begins to unwind, investors must buy back yen and reduce risk elsewhere. That means selling the very assets that benefited from years of cheap Japanese funding. Leopold's hedge fund may not have been an isolated event. It could simply be one of the first visible casualties of a much broader deleveraging. History offers a reminder. In 1987, tighter policy abroad helped trigger a chain reaction that culminated in Black Monday. Today, Japan—not Germany—is at the center of the story. And this time, the US government is already participating in the market to support the yen. Governments rarely intervene together unless they believe the alternative carries greater risks. Source: Casper @casper_smc

🏦 Bank of Zambia's Recent Monetary Policy Decision: Bank of Zambia (BoZ) has implemented a significant monetary policy change by increasing its policy rate by 50 basis points to 14.0% 📈. This decision, while facing some criticism, represents a calculated move to address persistent inflation and stabilize the Kwacha 💱. The policy action warrants a detailed examination to understand its implications and effectiveness in the current economic context. 💰 Interest rate adjustments serve as a fundamental tool in the central bank's monetary policy arsenal. The BoZ's decision to raise rates operates through several key mechanisms. Higher rates help curb inflation by reducing money supply and dampening excessive spending. Increased rates discourage unnecessary borrowing while promoting savings 🏦. The full impact of rate adjustments typically manifests over several months as economic actors adjust their behavior. Critics have questioned the effectiveness of repeated rate adjustments, but it's crucial to understand that monetary policy operates with inherent time lags ⏳. In Zambia's current economic environment, characterized by external pressures and commodity price volatility, interest rate management remains one of the most reliable tools available to the central bank. 📊 The BoZ's strategy extends beyond simple rate adjustments. The current inflationary pressures in Zambia stem from multiple sources, including currency depreciation, supply-side shocks, global economic uncertainties, and climate-related challenges such as drought affecting hydroelectric power generation ⚡. The recent policy rate increase helps anchor inflation expectations, preventing behaviors that could exacerbate price increases. Higher rates make the Kwacha more attractive to investors, potentially reducing capital outflows 📉. 💲 The Kwacha's vulnerability to external shocks has been a persistent concern. The policy rate adjustment addresses this through enhanced investment appeal, as higher rates attract both domestic and foreign investment by offering better returns 🌍. The policy helps manage capital movements and support currency stability, while clear monetary policy signals help build market confidence in the currency. ⚖️ While critics may question the repeated use of interest rate adjustments, these measures remain necessary for managing immediate inflation pressures, stabilizing the currency, protecting economic stability, and safeguarding public welfare. The policy rate increase represents a calculated step in maintaining economic stability and protecting Zambians from severe inflationary consequences 🛡️. Success depends on coordinated efforts across multiple policy areas and sustained commitment to economic reforms. objectives, while remaining responsive to both domestic and international economic developments 🌐. ©️ Natasha Lloyd

To anchor inflation expectations, SBP faces two choices: allow the Rupee (PKR) to depreciate — boosting exports while making imports costlier — or keep real interest rates firmly positive. The SBP favors the latter, maintaining currency appreciation and high real rates to preserve stability in the external account. High interest rates, however, do not seem to be the primary factor in stifling investment. Other obstacles like elevated taxes and energy costs play a critical role in curbing industrial expansion. Even a rate cut is unlikely to revive manufacturing sector investment. If the Rupee depreciates, inflation will escalate, potentially forcing SBP to pivot back to higher rates. In short, keeping real rates elevated remains essential until reserves safely cover 3.5–4 months of imports. It’s better to err on the side of caution, because at this stage of the game, ‘wait and see’ beats ‘do and sink.’ https://lnkd.in/dpWwnq-P

Botswana’s Devaluation: A Calculated Response to a Shifting Global and Domestic Landscape - My Two Cents as a Mathematics of Finance Graduate The Bank of Botswana recently devalued the pula by 2.76%, bringing the exchange rate to 13.35 against the USD. At first glance, this might seem modest, but in a nation so tightly linked to global trade, especially in diamonds, beef, and textiles, the implications run deeper than the numbers suggest. So, why now? Let’s unpack the economic pressure cooker behind the move: 1. Falling Diamond Revenues Botswana’s fiscal and export performance is still highly reliant on diamond sales. Global demand for luxury goods has softened amid tightening global monetary policies and geopolitical uncertainty (think: Russia-Ukraine, Red Sea disruptions, and slower-than-expected recovery in China). With De Beers sales softening, the pula has come under pressure. 2. Dwindling Foreign Reserves The Bank of Botswana has been drawing down reserves to defend the currency and meet import bills, especially for essentials like fuel, medicine, and food. Devaluing the pula helps ease this drain by reducing demand for foreign currency and boosting local export competitiveness. 3. Inflation and Imported Costs A weaker pula means higher prices for imported goods. Expect rising costs in fuel, pharmaceuticals, and machinery in the coming months. This imported inflation will likely nudge up the headline inflation rate, potentially prompting future monetary policy tightening. What this means for households and businesses: • For households, budgets will tighten. Higher fuel and transport costs could cascade into food prices, schooling expenses, and medical bills. • For businesses, especially those relying on imported inputs (manufacturing, retail, construction), margins may shrink. Some may pass on costs to consumers; others might delay expansion or rethink sourcing strategies. From a risk management perspective, this kind of environment underscores the importance of: • Scenario analysis • Interest rate & FX hedging • Liquidity planning Policy & Industry Response: • Financial institutions can step in to provide guidance, beyond credit, by offering practical exchange-rate risk training to clients and front-line staff. • Government & private sector collaboration will be key. Globally, we’re seeing a trend of currencies weakening against a resurgent dollar, driven by persistent Fed rate hikes and capital flows toward “safe” assets. Even the South African Rand has faced similar pressure. Botswana is not immune. This is not just a monetary policy adjustment, it’s a strategic recalibration in response to external shocks and internal vulnerabilities. If approached with coordination and foresight, it can help build resilience, stimulate local production, and reshape how we engage with the global economy. Let’s keep talking, analyzing, and most importantly, adapting.

𝐉𝐏𝐘'𝐬 𝐄𝐱𝐭𝐫𝐞𝐦𝐞 𝐔𝐧𝐝𝐞𝐫𝐯𝐚𝐥𝐮𝐚𝐭𝐢𝐨𝐧: 𝐀 𝐂𝐨𝐧𝐭𝐫𝐚𝐫𝐢𝐚𝐧'𝐬 𝐁𝐞𝐭   The Bank of Japan tightened its monetary policy, raising the policy rate to 0.25% and reducing bond purchases. The Fed held rates steady but signaled a possible cut in September. These narrowed the 10-year US-Japan bond yield gap to around 3%. Given scenarios of 2.5-3.5% 10-year yield differentials (explained below), USDJPY is estimated to be around 129-146.   The PPP model (explained below) shows JPY undervaluation above +2 standard deviations, indicating potential for long-term reversion.   However, overestimated core inflation and slowing real wages in Japan may challenge BoJ’s hawkish stance, suggesting USDJPY undervaluation—even reverting—might persist. In other words, while our fundamental analysis supports a bullish JPY outlook, short-term market dynamics could prolong the undervaluation.   𝐄𝐱𝐩𝐥𝐚𝐧𝐚𝐭𝐢𝐨𝐧: 𝙏𝙝𝙚 𝙮𝙞𝙚𝙡𝙙 𝙙𝙞𝙛𝙛𝙚𝙧𝙚𝙣𝙩𝙞𝙖𝙡𝙨 𝙢𝙤𝙙𝙚𝙡 suggests that the difference in interest rates between two countries can influence the exchange rate between their currencies. If the interest rate in one country is higher, investors might be attracted to that country's currency, increasing its demand and strengthening its value.   𝙏𝙝𝙚 𝙋𝙋𝙋 𝙢𝙤𝙙𝙚𝙡 suggests that over the long term, exchange rates should adjust to equalize the purchasing power of different currencies. If a basket of goods is cheaper in one country compared to another, the currency of the cheaper country is considered undervalued.   As mentioned above, the JPY is undervalued by more than 2 standard deviations based on the PPP model. This means that the Japanese yen is significantly weaker than it should be compared to other currencies, based on the theory of PPP. As a result, the PPP model suggests that the Japanese yen is likely to appreciate in the long term to correct this undervaluation.   In summary, both the yield differentials model and the PPP model are used to predict exchange rate movements. The yield differentials model focuses on the impact of interest rate differences, while the PPP model focuses on the relationship between price levels and exchange rates.   Credit: Siwat Nakmai, Audrey Wang, CFA Source: https://lnkd.in/gxDv_q28 ~~~~~~~~~~ Macrobond Financial offers 300M+ data series and code-free analytical tools, plus an extensive chart library at your fingertips. Request a demo here: https://lnkd.in/gXpkVvMG