The US Dollar Stays Strong as Markets React to Economic Data and Global Financial Watchdogs

Today, the US dollar remained strong and close to a seven-week high due to robust economic data reinforcing expectations that the Federal Reserve will increase interest rates for longer. The dollar index, which measures the US currency against six major currencies, was at 105.17, slightly below its seven-week peak on Friday after better-than-anticipated data was released.

Following South Africa's official inclusion in the global grey list by the Financial Action Task Force (FATF), the rand dropped to R18.42 against the US dollar on Friday, its lowest level since May 2020 and slightly worse than those seen in November 2022. The greylisting had primarily been factored into the market, as the finance ministry had indicated it was likely to happen. South Africa was added to the list, which identifies countries that do not meet the required standards for combatting money laundering and terrorist financing.

Last week, the rand was under pressure but improved slightly after a better-than-expected budget speech on Wednesday. It opened at 18.43 to the US dollar on Monday morning. Markets are also anticipating a higher peak interest rate for the European Central Bank (ECB) and the Bank of England (BoE), as the Eurozone grapples with rising inflation. The ECB cautioned that additional rate hikes are unavoidable.

Some background on the FATF.

The Financial Action Task Force (FATF) is an inter-governmental body established in 1989 by the G7 countries to combat money laundering, terrorist financing, and other threats to the international financial system. Its primary role is to set standards and promote effective implementation of legal, regulatory, and operational measures for combating money laundering, terrorist financing, and other related threats.

One of the key tools used by the FATF to achieve its objectives is the publication of lists of countries or jurisdictions that are considered to have deficiencies in their anti-money laundering and counter-terrorist financing regimes. There are two types of lists published by the FATF: the black list (also known as the "high-risk and non-cooperative jurisdictions") and the grey list (also known as the "jurisdictions under increased monitoring").

The global grey list is a list of countries or jurisdictions that have been identified by the FATF as having strategic deficiencies in their anti-money laundering and counter-terrorist financing regimes but have committed to working with the FATF to address these deficiencies. Countries on the grey list are subject to increased monitoring and are required to take specific steps to address the identified deficiencies within a specified timeframe.

Being on the grey list can have negative consequences for a country's reputation and economy, as it can make it harder for businesses and financial institutions to operate internationally, and may result in reduced foreign investment and increased regulatory scrutiny. Therefore, countries on the grey list often take steps to address the identified deficiencies as quickly as possible in order to be removed from the list.