The Ghanaian cedi could see gains against the US dollar if Saudi Arabia follows through on its decision not to renew its 50-year petro-dollar agreement with the United States. This assertion comes from Kodzo Dziwornu Letsa, a Currency and Fixed Income Trader.
The expiration of this crucial contract on Sunday, June 9, 2024, allows Saudi Arabia to sell oil and other goods in various currencies, including the Chinese RMB, Euros, Yen, and Yuan, rather than exclusively in US dollars.
“This is expected to put a strain on the power of the dollar as a global reserve currency, considering the deal’s value exceeds $3 trillion. I expect this to marginally weaken the dollar in the coming weeks,” Mr. Letsa told The Accra Times.
This development coincides with another significant shift: the BRICS+, an intergovernmental group, which includes Brazil, Russia, India, China, South Africa, and new entrants, has agreed to trade in their individual currencies instead of the dollar. These two major global developments are likely to weaken the dollar and, conversely, strengthen the cedi and other currencies, according to Mr. Letsa.
Join our WhatsApp Channel for more news
The cedi has been struggling since the beginning of the second quarter, depreciating by over 15% from the start of the year to date on the interbank market. This depreciation has increased the cost of goods and services, utility tariffs, and heightened anxiety within the business community.
The severity of the cedi’s depreciation compelled the Bank of Ghana (BoG) to implement measures to curb what they consider illegal practices in the forex market. These measures, which included a crackdown on illegal operators, led to a temporary appreciation of the cedi between June 4 and 6, but that gain has since reversed.
On Tuesday, June 11, the US dollar opened trading at GH¢15.10 for bids and GH¢15.25 for offers, higher than the previous day’s figures. Bids for the dollar flooded the market early in the morning, but there were no matching offers. “There’s not a single offer on the market as it stands now.
Yesterday, we had offers touch as high as GH¢15.30 in the morning, but the BoG’s $11 million intervention in the afternoon helped to calm the waters,” Mr. Letsa said before noon on Tuesday.
There are concerns that the cedi will lose more ground in the coming weeks since the only significant inflow expected soon is the third tranche of the International Monetary Fund (IMF) support of $360 million, which could come later this month after the IMF Board meets on Ghana’s program.
However, global developments such as Saudi Arabia’s decision not to renew its five-decade petro-dollar deal could bring some relief to the cedi. Though this might not happen immediately, market watchers predict that the cedi could claw back some of its losses against the dollar in the coming weeks. Forex traders at some international banks operating in Ghana have already started pricing the dollar lower for their forward deals, likely in anticipation of a weakening dollar globally.
About the Saudi-US petrol-dollar deal
In 1974, the petrodollar agreement was struck, in which Saudi Arabia agreed to sell oil exclusively in US dollars in exchange for US military, security, and economic development assistance. The deal effectively tied the value of the US dollar to global demand for oil and ensured its continued dominance as the world’s primary reserve currency. It also replaced gold as the standard of value and enabled the US to maintain dominance over international trade.
The reasons behind Saudi Arabia’s decision not to renew the contract are part of a larger geopolitics which is still unfolding yet to be fully understood.
