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The US dollar has dominated global trade and central bank reserves since World War II. But the share of the USD has declined from global reserves over the years. While 71% of central bank reserves worldwide were held in the greenback in 1999, the share shrank to 59% in 2022. The decline is at least partially a consequence of financial sanctions. In addition to impacting the share of the dollar in central bank reserves, US sanctions have undermined the currency’s dominance in the forex markets. Discover how these sanctions impact forex trading.
Sanctions primarily restrict travel and trade with a business or individual in the target nation. They may also result in asset freezes. The US has popularly used economic sanctions to limit human rights abuses. For instance, in the 1980s, trade sanctions against South Africa contributed to ending apartheid in the region. In 2021, the US imposed sanctions against China as a measure to protect the human rights of the Uighurs.
The latest on the country’s radar has been Russia. The US has imposed over three times the sanctions than any other country on Russia. In an attempt to fracture the Russian economy, the US has imposed and extended multiple sanctions since Moscow attacked Crimea and Kyiv, in Ukraine, in February 2022.
The most recent sanction, as of 30 July 2024, was enforced on June 12, 2024. It halted the trading and settlement of dollar-ruble and euro-ruble forex pairs on the Moscow Exchange (MOEX) and the National Clearing Centre (NCC) of Russia. The news hit the unsuspecting Russian markets on a national holiday. However, OTC trade was not restricted. This came as a relief for Russians who had diversified their portfolios by investing in the euro and the US dollar to hedge against a Ruble crash.
FX-related sanctions can deeply impact the markets. The risks can be mitigated to a certain extent when the target country, Russia in this case, has been preparing for the “bad, but expected news.” Here’s how the event impacted currencies worldwide:
The news led to panic in the Russian markets, with regional forex traders rushing to buy the safe haven, the USD. The demand pushed the greenback up and the DXY ended the week 1.37 points higher.
Since the Russian ruble can no longer be traded against the greenback, sanctions exert downward pressure on the Russian currency. Consequently, the USD/RUB declined 6.57% in the 12 months to July 2024. The ruble had hit multi-year lows in June 2022, after the first few rounds of sanctions. However, it climbed back up with some support from exports and the Central Bank of the Russian Federation’s efforts to prop up the currency. Following the sanctions, China, India and Brazil purchased oil at subsidised rates from Russia to fill their inventories in record quantities.
Russia is one of the major exporters of crude oil in the world. With the ruble being banished from trade, Russian oil is largely sold in Chinese yuan. The CNY surpassed the JPY and GBP to become the fourth most-used currency in the world in December 2023, with a 22.9% y-o-y rise in the yuan internationalisation index in 2023. The USD/CNY had risen 2.02% year-to-date, as of July 30, 2024, thanks to global trade shifting to the use of currencies other than the greenback. The global de-dollarisation efforts have played a key role in robbing the greenback of its share of the global markets.
The NATO and US imposed sanctions together in June 2024. The market sentiment turned bearish on the euro and the euro currency index (EXY) lost 1.72 points within 2 days. This was natural since fuel prices had skyrocketed in 2022 due to the region’s dependency on Russian imports. As of July 2024, only land-bound nations still depend on Russia to fulfil their energy needs. Nations with direct access to the waterways have diversified their supplies. As the forex markets digested the news and realised that the EU’s energy needs were far more secure than they used to be in 2022, the euro returned to an uptrend. The EXY rose 1.81% through the month of July 2024.
The US and EU are considering more aggressive measures, if the Russia-Ukraine war does not end soon. One of these measures is freezing the Russian central bank’s assets, worth $300 billion, with plans to redirect the funds for war supplies and reconstruction efforts in Ukraine. The extent of the impact on the resilient Russian economy cannot be gauged yet. However, this will induce greater volatility in the oil and forex markets. Forex traders must stay updated on the latest developments in global geopolitics and trade agreements to effectively speculate on the FX markets.
Volatility creates immense opportunities. However, the complexities of geopolitics and other macroeconomic factors add to the risks. Forex traders popularly use contracts for difference (CFDs) to trade under such conditions. CFDs are derivative instruments that are traded on margin. Forex traders use these instruments to speculate on both rising and falling markets. Plus, CFDs allow you to hedge your positions by opening trades in both direction for your chosen FX pair. However, margin trading amplifies both profit and loss potential. Therefore, ensure that you employ robust risk management techniques for CFD trading.
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