Beyond the US dollar: Meet the surprise winners of 2023’s currency market

By the OFX team | 12 December 2023 | 5 minute read

Conventional wisdom goes that ‘strong’ currencies are deemed to be such because of fundamentals such as a robust underlying economy, strong exports and investment inflows and widespread global acceptance of the paper.

For centuries, the US dollar has been accepted as the world’s premier reserve currency – and certainly the most traded. Most major currencies such as oil, gold copper and wheat are traded in that denomination.

More recently the greenback has been popular because of the Federal Reserve’s aggressive rate rises, which have seen more foreigners buying the currency to access the higher yields on offer from US government paper.

Naturally, that makes the US dollar the ‘best performing’ currency of 2023 … doesn’t it?

Think again.

The rise and rise of the Afghani

The Afghanistan currency – the Afghani – has emerged as one of the fastest appreciating currencies of the year.

The Afghani rose a remarkable 18% in value in the September quarter and 16% over the year, measured against the US dollar.

One Afghani buys 0.014 US dollars.
(Currencies are always relative to another currency or sometimes a basket of currencies, which gives rise to an ‘exchange rate’).

While the US has a few fiscal and political issues – to put it mildly – the outlook for Uncle Sam still comfortably exceeds that of Afghanistan, which fell under Taliban rule two years ago and had struggled well before then.

According to a 2022 World Bank survey, two-thirds of Afghani households can’t meet their basic food and other needs.

The survey overall “paints a grim picture of living conditions in Afghanistan as widespread deprivation continues and food insecurity remains high, negatively impacting the economy and the welfare of the Afghan people, especially women and girls.”

So what’s going on with the Afghani?

According to India Today, the answer lies with the oppressive regime’s strict measures to enhance the currency, notably banning the use of US dollars and Pakistani rupees.
Online trading has been criminalised and offenders face a stretch in an insalubrious Kabul nick.

Another factor is that the United Nations has been sending regular planeloads of US dollars, totalling up to US$40 million, to support the poor for at least 18 months since the end of 2021.

These greenbacks are converted into Afghanis via money changers who operate in vibrant open-air markets.

And the winner is …

As of early December, the Afghani ranked as the third-best performer, behind the currencies of Colombia (the peso is up 19%) and Sri Lanka’s rupee (up 15%).

The Colombian peso’s outperformance is attributable to the country’s oil revenues, fast-growing economy, political stability following last year’s presidential election and relatively high interest rates.

In the case of Sri Lanka, the situation is more complex. The tear-drop-shaped nation’s currency plunged after it entered bankruptcy in 2022, so the economy has been recovering from that low base. The government has also taken measures to stabilise the currency.

A traditional safe harbour given the landlocked nation’s political stability, Switzerland’s franc has rallied 7.5% against the greenback.

The British pound has edged up 2.5% against the US dollar, a ‘sterling’ effort given the country’s inflation problems which demand higher interest rate settings relative to the Eurozone.

The ‘conflict’ currencies lag

On the flip side, this year’s worst performer by some margin was the Russian rouble, down by almost one-third despite bolstered oil revenues (the country remains one of the biggest oil exporters).

In a bid to bolster the currency, Vladimir Putin ordered the mandatory sale of foreign currency reserves in October, to bolster the currency in the wake of capital outflows, falling exports and recovering imports.

Another conflict currency, the Israel New Shekel is down 7%, but has recovered ground since the early days after the October conflict.

In a classic case of contrarian monetary policy, Japan has maintained a near-zero interest rate policy, even while other key economies were hiking rates to control inflation. As a result, the yen is about 5% off the pace for the year.

But, in early December authorities hinted this long-time fountain of cheap funding might dry up, prompting the yen to rally.

“Fortunes have been made by the beneficiaries of the Japanese printing presses,” says Ord Minnet broker Richard Morrow. “It’s interesting that the Japanese are thinking about slowing the printing presses while the US might need to restart printing greenbacks [to lower rates and avoid recession].”

Middle Eastern oil states dominate ‘most valuable’ list

While the Afghani has enjoyed a run of good luck, it’s not even close to being the world’s most ‘valuable’ currency, measured against the US dollar.

That league ladder is dominated by Middle Eastern countries buoyed by decades of oil wealth. These currencies are not freely traded but pegged at a rate determined by the authorities.

The ‘world’s strongest currency’ accolade goes to the Kuwaiti dinar, with one dinar buying US$3.24 US dollars.

In comparison, one euro is worth only US$1.08 and the well-traded Australian dollar fetches only US$0.66 cents (about 3% lower for the year).

According to Forbes, the dinar was introduced in the 1960s and was initially pegged to the British pound before being re-pegged to an undisclosed basket of currencies.

The Kuwait dinar pips the Bahraini dinar, which buys US$2.65 and the Omani rial (US$2.60). More intriguingly, the Jordanian dinar buys US$1.41, even though the landlocked nation has far fewer oil and gas reserves, a sluggish economy and high debt.

The petrodollar-fuelled tearaways are followed by the British pound and the Gibraltar pound, which is pegged with sterling on a one-for-one basis.

The Cayman Islands dollar is good value for money at US$1.20 reflecting the Caribbean Sea outposts’ status as an offshore financial centre and – of course – a tax haven.

Currency ‘winners’ can be losers

While appreciating currencies are great for overseas travellers and importers, the downside is that ‘winning’ nations become less competitive with their exports because they are more expensive for foreigners to buy.

That’s why China – the world’s second-biggest economy – has pegged the yuan at an artificially low rate for the last thirty years.

It may be a dent to national pride, but it is often in the interests of a central bank to subdue the value of a currency by whatever tools they have at hand.

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