More Global Forex Turmoil Ahead – Peso Not Immune


As if the global economy needed another crisis trigger, global currency markets are in historic turmoil. Over time, it cannot be contained without a more diversified global reserve currency system.

By early October, the Philippine peso had fallen 13% against the US dollar. It is now trading just below 59, holding near a record low in late September. And it is set for further depreciation.

Accelerating capital outflows have added downward pressure on the peso, with equity outflows reaching $1.2 billion so far this year. With trillions of US dollars in trade deficits weighing on the currency, the government has little choice but to react to aggressive Fed hikes.

Although the Bangko Sentral ng Pilipinas (BSP) has raised rates by a total of 225 basis points this year, it is forced to continue tightening to avoid further depreciation of the peso. Despite politicized efforts to attribute the rise in (imported) inflation and the squeeze of the peso to the Marcos government, the reality is that the global forex turmoil erupted months before the Philippines election. The pattern is clear (Figure 1).


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Source: Trading Economics; Difference Group

If the Fed sticks to its dot plot, interest rates could reach 4.4% by December, above the 3.4% projected in June, and climb to 4.6% l ‘next year. As a result, the peso could fall to an all-time low of around 62 pesos against the US dollar later this year. Just as the global forex turmoil could prevail until the first quarter of 2023.

The stakes are global.

Foreign exchange reserves fall by $1 trillion

According to Bloomberg, global foreign currency reserves have fallen by around 7.8% to $12 trillion this year; a drop of $1 trillion, more than in nearly two decades when Bloomberg began compiling its data.

The fall reflects the frenetic activity of central banks around the world as they struggle to step in and support troubled currencies.

At the end of September, the euro hit its 20-year low against the US dollar. Meanwhile, the British pound suffered an all-time low against the greenback. Recently, the pound has regained some lost ground, as has the euro. But further pressure will ensue as the Fed continues to tighten.

In September, Japan spent some $20 billion to slow the fall of the yen in its first intervention to boost the currency since 1998. That accounts for 19% of the loss in reserves this year. Yet the yen has already lost a fifth of its value this year, which could prove to be the worst since 1970. Meanwhile, Japan’s gross debt as a percentage of GDP could climb to almost 270% by the end of end of the year, the highest among the major advanced economies — and the most vulnerable to a crisis that would have global repercussions.

In September, Korea’s foreign exchange reserves stood at $417 billion, after taking a hit of $20 billion from the previous month. This is the fastest monthly decline since the Western financial crisis of October 2008.

Rupee all-time low, Yuan depreciates/appreciates

In India, foreign exchange reserves have fallen by $96 billion this year to $538 billion. Pressures are building as inflation rises and Fed hikes continue.

While currency depreciation may benefit exporters, it tends to promote capital flight and imported inflation, both of which spill over into emerging Asia. Hence also the fall of India’s foreign exchange reserves by 110 billion dollars over the last 13 months and the historic low of the rupee against the greenback.

In late September, Reuters reported that China’s state-owned banks were preparing to sell dollars and buy yuan to boost the local currency. The yuan fell 11% against the dollar and could end the year with its biggest drop against the greenback since 1994.

Yet dollar pressures only tell part of the story. China’s central bank is increasingly managing the yuan against the currencies of a broad group of major trading partners, not just against the greenback. Despite its decline against the dollar, the yuan appreciated against the euro, the yen and other major currencies.

Today, forex volatility is not primarily an economic problem. It also reflects geopolitical objectives.

Huge Forex Interventions

As the global economy teeters on the brink of another global recession, the Fed’s belated and aggressive tightening is causing huge currency shocks to the global economy.

While the scale of the decline in global foreign exchange reserves is massive, efforts to tap into reserves to protect currencies are nothing new. Nevertheless, these huge forex interventions are taking place in the most difficult economic and geopolitical moment since World War II, due to a series of shocks:

– The failure of the global recovery since 2017, a consequence of US protectionism and misguided trade wars;

– The subsequent Covid-19 pandemic and accompanying global depression and resulting lost years in many countries;

– Over a decade of huge fiscal stimulus, ultra-low rates and quantitative easing cycles in the West;

– The resulting debt crises in many middle and low income countries; and

– The US-led NATO war against Russia in Ukraine, which resulted in global energy and food shocks and the worst nuclear crisis since 1962.

Even though the strong dollar will make the United States a more expensive place to produce, it will affect America less severely than its trading partners, primarily because American trade is almost entirely priced in dollars.

But what will happen when the soaring dollar against other major currencies fades away? Some previous sharp rises in the value of the dollar, particularly in the mid-1980s and early 2000s, were eventually followed by sharp declines. And this time could turn out to be worse.

The rise of the dollar neither stabilized nor strong

After two decades of postwar recovery in Western Europe and Japan, the United States began to suffer huge trade deficits. In 1971, President Nixon unilaterally ended the convertibility of the dollar into gold, resulting in a price shock that reverberated around the world.

As gold no longer offered a standard of value, the perception of value replaced value itself.

Since the 1970s, three periods of soaring dollars have been followed by periods of decline which have caused a great deal of international collateral damage. Each of these surges reflects a gradual relative erosion of the dollar. When the dollar surged with sky-high rates in the early 1980s, US sovereign debt was still less than 40% of US GDP. With the surge of the early 2000s, the ratio hovered around 55%. This prevailed until the 2008 crisis, which was overcome by massive indebtedness that pushed the ratio beyond 100% in the early 2010s.

Then came the pandemic and the irresponsible fiscal policies of the Biden administration and now the ratio exceeds 137% of US GDP (more than twice as high as the Philippines’ 62%). As the trend line will accelerate in the coming years, the ratio could double by 2050 (Figure 2).


Source: Trading Economics;  Difference Group

Source: Trading Economics; Difference Group

Towards the crisis

Today, US debt to GDP is where Italy’s was in the early 2010s, just before Rome’s debt crisis. Here’s the problem: the Italian lira is irrelevant in international transactions, but the US dollar is not.

The presumed strength of the US dollar is no longer based on US economic fundamentals, but on the perception that these fundamentals prevail, despite drastic changes in the global economy.

The US dollar is no longer a durable haven, but a temporary one. And that is why the day of judgment is no longer a question of principle, just a question of time.

Dr. Dan Steinbock is an internationally recognized strategist in the multipolar world and the founder of Difference Group. He has worked at the Indian, Chinese and American Institute (USA), the Shanghai Institutes of International Studies (China) and the EU Center (Singapore). Learn more at


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