Top currencies at a glance: what drove the 5 most important currencies in 2023?
- Currency exchange
What was driving the 5 top currencies in 2023 so far?
Currency exchange rate fluctuations can heavily impact a business’ profitability, above all in smaller companies. Especially in today’s turbulent times, it is therefore important to keep an overview of the currency markets. To make it easier for you, we have summarized how the five most important currencies in the world have performed against their peers so far in 2023 (January – April 2023):
- USD: continued to lose value to its peers
- EUR: further confronted with high inflation figures
- GBP: recovering from the political and economic circumstances
- JPY: calmed down and shows upward trend
- CNY: remains relatively stable currently
USD – US-Dollar
Although the Federal Reserve continued its course of interest rate hikes, the USD did not perform very well to date and lost value against its peers. The interest rate hike is currently driven by fears that this could lead to a recession in the US. Recent developments with historic bank failures have made clear how dangerous high interest rates can be for the economy and also for the banking sector. As markets tend to close what are known as “chart gaps”, there is further room for weakness of the USD. The EUR/USD chart below shows the “Ukraine gap” that happened at the beginning of the conflict in the Ukraine. Thus, the EUR/USD level of 1.1260 could well be a potential upside target for further weakening of the USD.
The EUR/USD chart below illustrates the price gap:
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EUR – Euro
Europe continues to face high inflation figures, well above the 2% inflation rate targeted by the central banks. Although energy prices have fallen drastically, prices for goods and services continued to rise. The recovery in equity prices and a generally greater willingness to take risks helped the Euro to perform well against the other currencies in the basket. Surprisingly, the CHF was the only currency pair that remained fairly stable against the EUR. Since our last update in August 2022, the pair has been trading in a quite tight EUR/CHF range of 0.9700 – 1.0100. When looking at the chart below, it is clear that the CHF strengthens when the market is in a low-risk environment, and the pair recovers when the situation calms down. It looks like EUR/CHF continues to be one of the best indicators of the overall risk perception of the market.
The chart below shows the development of the EUR/CHF exchange rate:
GBP – British Pound Sterling
The turmoil in the political landscape, massive government spending and a Bank of England fighting inflation contributed to a slightly weaker Pound against the Euro. Similar to the EUR, the GBP also gained a lot of ground against the USD in recent months. This makes it clear that we are dealing with a weakening USD rather than a strong GBP and EUR. The future interest rate path and the corresponding reaction of the overall British economy and the real estate market to this “new normal” will definitely have a strong impact on the future price of the GBP.
JPY – Japanese Yen
The Japanese central bank is known for its currency interventions and did it again. USD/JPY approached multi-year highs above 150.00 USD/JPY, forcing officials to intervene decisively in the currency market. In the last intervention a few years ago, the Bank of Japan bought USD at rates around 80.00. Now, the Bank of Japan has sold those USD, which is an incredible achievement. In the meantime, the situation has calmed down and the Japanese Yen continues to trade within a wide trading range of 128 – 138 against the USD. Against all other currencies, the JPY remains under pressure and the JPY pairs are trending upwards.
The chart below shows the evolution of the USD/JPY rate since our last update, including the Bank of Japan intervention:
CNY – Chinese Yuan/Renminbi
The Renminbi has also lost a lot of ground against the Euro. At our last update, the currency was trading below EUR/CNH 7.00, and now we are almost 10% higher. Despite the volatility against the USD, the Chinese currency remains relatively stable. China and other BRIC countries are trying to settle more and more trades outside the USD clearing system, thus weakening the global dominance of the USD. So far, however, this has not brought any success. The biggest sword of Damocles for the Renminbi continues to be Taiwan. An escalation of the conflict could put considerable pressure on the CNY and drive up prices, which is certainly the biggest risk factor in the long term.
The below chart reflects the current upward trend of EUR/CNH:
Conclusion: What’s next for the weakening USD and the increasing interest rates?
Since our last update, the market topics have changed from zero interest rates to rising interest rates and from a strong to a weak USD. The issue of inflation was also barely present in mid-2022. Negative real interest rates support government budgets as long as the economy continues to grow and we don’t see a hard landing in the economy. We are eager for our next year-end update and hope that questions such as “How far will interest rates rise?” and “Is the Dollar strength over?” can be answered by then.
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