Highest dollar in almost two years

12.02.2019 11:34|Marcin Lipka

"One dollar cost more than 3.84 PLN on Tuesday. This is the highest value since May 2017, i.e. for almost two years. Strong dollar appreciation in relation to the zloty results from both zloty weakness and dollar strength," writes Marcin Lipka, Conotoxia Senior Analyst.

The global dollar's strength is mainly the result of the problems of other currencies, especially the euro. The eurozone's situation deteriorated significantly in the second half of 2018. Italy entered a recession and Germany is stagnating. The outlook for 2019 is not good either. The European Commission estimates that GDP will grow by 1.3%, which is likely to be half the speed of the United States, where the IMF expects it to grow by 2.5%.

Politics did not help

There is also very little to say about the political situation in the common currency area. Problems with maintaining the government coalition occur in Italy, in Spain there is speculation about early elections. This increases the risk of radicalisation of the political scene and a good outcome for populist groups, which usually wants a strong increase in spending, but is afraid to carry out structural reforms that improve the competitiveness of the economy.

These negative trends are visible before the elections to the European Parliament (23-26 May), which may provoke speculation about systemic threats to the single currency area or the entire Union. Moreover, the EU still cannot reach an agreement with the United Kingdom on Brexit. A chaotic exit for the UK from the EU would not be good either for the economic situation on the British Isles or for the EU. As a result, the euro has been very close to its lowest value since June 2017 in relation to the dollar, i.e. a drop in EUR/USD below 1.12.

Others are doing better

The dollar strengthening in relation to the zloty is mainly a result of problems in the eurozone and the strong link between the Polish economy and the EU. It may also result from the worse condition of Poland's region compared to previous expectations and the situation of emerging markets on other continents.

Latin America has somehow survived the crisis in Brazil, Mexico and Argentina, and for several weeks there has been a relative calm situation, as well as there being signs of capital inflows. The Chilean or Colombian peso and the Brazilian real gained 3-4% in relation to the dollar.

The situation in Asia has also improved. Lower oil prices have reduced concerns about the economic condition of India and Indonesia. The fear that the US-China customs war would clearly harm Asian economies has diminished. As a result, the Indonesian rupiah or the Chinese yuan gained about 1-2% to the dollar.

The zloty weakens even to the forint. The economy may save it

Since the beginning of the year, the zloty has lost 2.5% to the dollar and ranks second to last among 31 currencies of developed and emerging countries compared by the Bloomberg agency.

The Polish currency is not only weaker in relation to the dollar, but also to the forint. The zloty reflects investors' attitude towards the whole region. Sometimes a similar situation occurs with the Mexican peso in Latin America. The forint is also in good condition in relation to the zloty (it has strengthened by about 1.5% since the beginning of the year), as it is possible that the Hungarian central bank will raise interest rates this year. In Poland, the chances for such a move are almost zero.

In general, the threats to the zloty should not be underestimated either. Its condition may deteriorate along with further strengthening of the dollar or deepening of the eurozone's problems, but panic depreciation is not expected so far, and the levels of 4.00 PLN per dollar or 4.40 PLN per euro are unlikely to be exceeded in the near future. The Polish economy, despite a clear slowdown, will remain relatively good. There are also no serious imbalances (e.g. current account deficit) in the Polish economy that would favour a rapid depreciation.


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