The Zimbabwe ZiG currency has maintained its stability against the US dollar four months after launch. The USD to ZiG exchange rate was trading at 13.76 on Monday, according to the Zimbabwe Central Bank. It was trading at 1.33 against the South African rand and by 17.60 against the British pound.
US dollar sell-off intensifies
The Zimbabwe ZiG has done well even as the US dollar has sold off deeply. The closely-watched US dollar index (DXY) has slumped for two consecutive days and bottomed at $102.65 on Monday. At its lowest point, it was down by over 3.63% from its highest point this year.
The dollar’s sell-off accelerated after the Federal Reserve delivered its interest rate decision on Wednesday. In it, the Fed welcomed the recent inflation trends and hinted that it was now focusing on the labor market.
Well, the labor market is not doing well either and is in its worst shape in years. Friday’s non-farm payrolls (NFP) data showed that the economy created just 114k jobs in July while the unemployment rate rose to 4.3%.
Therefore, calls for a rate cut in the next meeting are growing at a rapid pace. Mohamed El Erian, the chief economist at Allianz, had even called for a rate cut in the last meeting. Other economists believe that the Fed is late for cutting rates and could trigger a recession.
Therefore, the US dollar has softened against most global currencies, especially the Japanese yen, which has slumped by over 10% from its highest point this year. It has also softened against several African currencies like the Kenyan shilling and the South African rand.
US dollar index chart
Zimbabwe ZiG is holding on well
Meanwhile, in Zimbabwe, the recently launched Zimbabwe Gold (ZiG) has maintained its stability against the US dollar and other currencies like the rand, euro, and sterling.
For starters, ZiG is a unique currency or experiment that seeks to solve the crisis in the other Zimbabwean currencies. It aims to achieve its stability by being backed by gold and the US dollar.
At launch, the currency was backed by $100 million and 2.5 tons of physical gold. Zimbabwe has continued to add more funds to its reserves. These reserves have now risen to over $375 million.
However, it is still unclear whether the ZiG will succeed where the other Zimbabwe currencies failed. Besides, it is a unique experiment that has not been tried in other countries before. Also, it is unclear where the central bank will get money to add to its reserves when the ZiG’s demand rises.
Instead, places like Hong Kong, Saudi Arabia, Qatar, and Jordan have pegged their currencies to the US dollar. Over the years, these countries have spent billions of dollars maintaining the peg.
Zimbabwe’s central bank has also intervened in the forex market recently amid high dollar demand. Just last week, it spent over $50 million to support the ZiG as demand for the USD rose.
ZiG usage is growing but is still low
One reason for the Zimbabwe ZiG strength is that it is one of the rarest currencies in the country. Most people have never seen and interacted with it. A recent report showed that the use of the currency had more than doubled since its inception in April and it accounts for about 30% of all transactions.
A key challenge that the ZiG faces is trust among Zimbabwean companies and individuals, who have seen their purchasing power dissipate in the past few decades. All the last five currencies were launched with a lot of optimism, only for them to lose their market share because of increased printing.
The other issue is that Zimbabwe has become a dollar-based economy in the past few years, with most companies operating solely with the currency. For example, most players in sectors like real estate quote their properties in US dollars.
Zimbabwe has set out a plan to ensure that the ZiG is the sole legal tender while the president wants the transition to happen faster. Moving to a local currency, the government believes, will give it economic sovereignty.
Another risk for the ZiG is that the economy was not doing well as the impact of the El-Nino-induced drought continues. The drought means that Zimbabwe will need to spend more money on imports.
It also means that Zimbabwe’s biggest export – tobacco – will see lower supply at a time when prices are falling. The most recent data shows that the US tobacco import price dived to $4,730, down from over $5,098 in June.
Other top Zimbabwean exports like platinum and palladium have also slumped, with platinum falling to $940, down by 15% from the highest point this year.
Therefore, while Zimbabwe’s inflation has dropped recently, there are signs that the economy will remain under pressure in the next few months.
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