The argument on our obsession with stronger currency & its impact💥
Pakistan has its own set of economic problems and currency devaluation is one of them for a long time. However, this is not something which is particular to Pakistan as a lot of other developing nations go through this phenomenon one way or the other. What has been new in recent times (post COVID) is the devaluation of currencies from developed countries like Japan🇯🇵, UK🇬🇧, the EU🇪🇺 to name a few.
Apparently, what has been happening in the world currencies’ market should be a happy movement for all the Americans as their purchasing power has increased relative to the entire world. All the imported ↘️ products that Americans🇺🇸 buy now become cheaper for them due to exchange rate parity.
The major benefit currency appreciation 🔼 bring for a nation like Pakistan is obvious where it results in the reduction of price of imported commodities and hence it will impact positively on inflation overall as we have huge import bill for energy.
However, there is a much dreadful 🚩 impact if the currency appreciation occurs when there is manipulation involved which can be done through burning of precious foreign currency reserves to defend the failing currency most of the time. Have a look at the news article below from Bloomberg pointing towards the problem US is facing due to currency (USD) appreciation.
The surging dollar hurts the value of US companies’ international sales, with Morgan Stanley calculating that every 1% change in the Dollar Index has a negative 0.5% impact on profits. Fourth-quarter S&P 500 earnings will face an approximate 10% headwind from the stronger currency, in addition to other issues like soaring input costs, Wilson said.
– With input from Bloomberg
This shows how even a mighty country like USA rightly so is afraid of surging currency value. The appreciation of USD impacts the US exports negatively rendering the products less competitive in the global markets (unless offcourse its a product like iPhone which seems to be unstoppable as of now click here to read about my investment in apple).
Moreover, this will also impact the stocks prices of US based companies as lower revenues will impact the companies earning and bottomline – hence the performance of US stocks are also linked with the Dollar index (DXY) broadly.
Not very long ago, US was blaming China 🇨🇳 for currency war and manipulation and the reason was none other then the value of Chinese currency which was allegedly engineered to be devalued to improve competitiveness of exports from china.
From the perspective of a country like Pakistan 🇵🇰 – manipulation of exchange rates are very dangerous as once the hell break loose there is no stopping, which we witnessed in 2018. Moreover, fixing the exchange rate parity adversely impacts the exports and hence a large number of people are impacted who are employed in this sector. This thought is countered by some economists by saying that even with devaluation in past there has been no significant increase in exports – so I will leave this to the imagination of the reader here.
However, we cannot deny that in past few months due to instability 💢 – the PKR depreciation has been violent and this volatility might have been abused being reflected in the REER graph 📈 which was hovering at around 94% in Aug 2022. REER is a lagging indicator with ideal value being 100% showing balanced exchange rate, however, based on this we cannot predict the future exchange rate, and the volatility of PKR in past few months and REER’s number during that time shows that it had the upside potential during that time which might have been suppressed due to incapability of government.
Time will only tell what’s best for the country – but one thing is for sure, you have to be financially educated in order to help yourself steer through the bad times. You can improve your knowledge on personal finance by subscribing to the YouTube channel here. 🔴
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