July currency review

Ever since Russia invaded Ukraine in late February, disrupting and destroying much of its economy, there has been huge downward pressure on the Ukrainian hryvnia. Until very recently, the central bank in Kyiv successfully defended the currency's value, but at great cost in terms of foreign-exchange reserves. The pressure finally became too much to bear on 21 July, when the hryvnia was devalued by 25% against the US dollar. Annual inflation, already at 18%, is sure to rise further, offsetting to at least some degree the impact of the weaker exchange rate on international assignees' cost of living indices.

Crisis-hit Pakistan also devalued its currency this month (see first table below), partly to protect depleted foreign-exchange reserves, but also to make its exports more competitive. Unfortunately, the move will worsen one of the major problems facing the country, namely its huge and unaffordable foreign debt, mainly owed to China. The value of that debt, in rupee terms, has just gone up. There could be worse to come for Pakistan.

Among the other biggest losers in July was the Russian rouble, which continued its recent roller-coaster ride. Having responded surprisingly positively to higher interest rates and central bank intervention in markets in recent months, the currency showed its fragility by plummeting 10% as the Bank of Russia slashed interest rates in its July meeting. Since Russia's assault on Ukraine began, the rouble's monthly percentage movements against the euro have read -8, -15, +18, +6, +19 and now -10. This clearly shows the folly of reacting too hastily to sharp exchange rate movements. Consistent application of cost of living adjustments calculated by ECA throughout assignments is almost always the best policy for managing your expatriates' spending power.

More central bank action, this time in Belarus, caused its currency to be the strongest in the world in July (see next table). The Belarusian ruble, whose value is normally managed with reference to a basket of major currencies, suddenly gained 27% against the euro between 25 and 27 July. The move was almost certainly an attempt to reduce inflation, but may also have been linked to efforts to align the Belarus economy with the Russian one.

In other currency news, the long debate about the wisdom of keeping the Hong Kong dollar's peg with its US namesake intensified this month. With Beijing's dominance over Hong Kong having greatly increased in recent years it might make more sense for the local dollar to be aligned with China's yuan renminbi instead. The peg to the US dollar means monetary policy must follow the US lead, but with Hong Kong's annual inflation at only 1.8% compared to the US' 9.1%, that seems economically inappropriate. However, as the peg has been in place for several decades, removing it could be destabilising. With China struggling with weak economic growth, widespread Covid outbreaks, geo-political tensions relating to Taiwan and a property market in danger of collapse, the last thing Beijing wants right now is more instability.

Finally, here is this month's selected currency movements table: