“More and more signals suggest that the US currency will be even stronger in the coming months. The most important indicator being interest rates. The fear of a trade war, the worsening economic situation in Latin America and the dangerous economic policy in Italy also attract attention. All events tend to favour the dollar and harm other currencies, including the zloty," writes Marcin Lipka, Conotoxia Senior Analyst.
The dollar index, which measures the overall condition of the American currency, has been but a hair away from exceeding its peak from July last year. Many emerging market currencies, which have been either the weakest in many months or are close to the lowest levels in history, have been losing to the dollar. What is pushing the dollar up and why may this movement continue?
Eurozone without interest rate increases
One of the main governing elements of the currency market is interest rates, especially the prospect of their change in the following quarters. Here, the dollar has a major advantage over its competitors. The European Central Bank suggested on Thursday that it would leave interest rates below zero at least until September 2019. It is possible that this period could be prolonged, as economic growth in the eurozone is slowing down, and this may mean that it is difficult for inflation to reach the target. In just one day, the euro lost 2% of its value to the dollar.
The European Union may face not only slower than expected economic growth, but also problems in the Italian economy. For the time being, the discussion about Italy leaving the eurozone has calmed down, but the economic ideas of the new coalition are far from improving the competitiveness of the Apennine economy. Instead, they are approaching the definition of irresponsible fiscal policy or a simple over-distribution (e.g. guaranteed income of 780 EUR per month).
Uncertainty in the Union may give rise to the prospect of a world trade war. While severe foreign trade restrictions between the EU and the US are not the most likely scenario, the growing tension between China and the US, even if it does not end in a real trade war, may worsen the sentiment of entrepreneurs to hoard cash instead of investing it. This means that economic growth is slowing all over the world. The open economies will lose the most (those which earn primarily from trade, e.g. the EU, including Poland, part of Asia) and the closed ones - definitely less (according to the World Bank, US exports account for only 12% of GDP, EU 43% and Poland for over 50%).
Interest rates above 3% in the USA
In the United States, the situation is moving in a completely different direction. A strong stimulated economy requires the Federal Reserve to raise interest rates. The long-term effect of tax cuts and infrastructure investment is not entirely clear, but it should improve economic performance and consumer sentiment over the next few quarters, as well as reduce unemployment.
This opens the way for the central bank in the USA to raise interest rates quickly. The Fed macroeconomic forecasts published on Wednesday assume that interest rates will exceed 3% at the end of 2019. As a reminder, they are likely to remain close to zero in the eurozone.
The weakest links collapse
The high interest rates in the US compared to other countries make it difficult for countries with poor credit ratings to raise capital and for those where a rising dollar is threatening the economy.
The leading economies of Latin America are under pressure. Brazil, for example, is experiencing increasing difficulties in keeping its exchange rate under control. The sale of the Argentine peso has been deepening, even though the country is expected to receive 50 billion USD in aid from the International Monetary Fund and interest rates have been raised to 40%. Peso has lost 15% of its value in a month and the head of the central bank has resigned.
The Mexican peso is also closer and closer to the historical minima in relation to the dollar. In less than a month the peso weakened by 7% to the American currency. Mexico is under pressure due to the risk of a wider trade dispute with the US and the presidential and parliamentary elections on July 1st.
The Turkish lira has lost as much as 20% since March. Its situation has not stabilised, despite interest rates rising to 17.75% and President Erdogan calling for the public to sell the accumulated dollars and exchange them into the Turkish currency.
What does this all mean for the Polish economy and the zloty?
Global economic turbulence, high interest rates in the USA, economic problems of some countries in the EU or reluctance to invest in many developing countries can only cause problems for Poland. This may mean a significant slowdown in GDP growth in Poland, a weaker condition of domestic exports and worse prospects for domestic enterprises.
The channel that may show the fastest growing risk of weakening economic situation in the near future is the valuation of the zloty. This may be particularly evident with the continued appreciation of the dollar in global markets and the increasing scale of the economic downturn for trading partners. In such a scenario, it is possible that the dollar will go up to around 4 PLN, and the Swiss franc a dozen or so cents and possibly even the globally weak euro in the second half of the year.