World Economic News
Ruble Price To Be Determined by Dollar and Euro
The Bank of Russia is shifting its exchange-rate policy. Now, the price of the Russian ruble will be determined not only by the U.S. dollar, but by a basket of currencies, which will be built by Russian monetary authorities, Izvestia reported March 1.
This will expand the possibilities of the Central Bank of Russia, which will be able to stop supporting the U.S. dollar on the Russian market, the newspaper said. Analysts expect that the new rules will be introduced after the Presidential elections on March 14.
Oleg Vyugin, Deputy Chairman of the Central Bank, said at a news conference, that the dollar should be replaced by a basket of currencies including the dollar and the euro.
Izvestia reported that the largest part of export proceeds comes to Russia in the form of dollars, but the demand for euros is also significant, as some imports are paid for in euros. That is why the strengthening of the ruble against the dollar was compensated for by the euro's strengthening against the American currency. This helped Russian producers, as prices for imports from Europe remained high.
But Russian owners of dollars did not benefit from this advantage. The weakening of the dollar hit their personal savings, and they started shifting to the euro and the ruble instead. It became clear that the pegging of the ruble's exchange rate to the dollar does not correspond to reality anymore.
This played into the hands of the Central Bank, the newspaper believes: The new strategy will give it more freedom to determine the national exchange-rate policy. It is the first step towards achieving the main goal of Russia's foreign-exchange policy: to ensure that the ruble is fully convertible, Izvestia said.
However, this does not mean that the Central Bank will withdraw from the foreign-exchange market. The Central Bank has enough foreign currency, and its ruble resources are unlimited. According to analysts, the real exchange rate of the Russian ruble (taking into account the inflation rates of the previous years) is still 17% below its level before the 1998 default. The Central Bank will work on this problem. For the Russian people, the best strategy now would be to transfer their savings into rubles and wait until inflation goes down, Izvestia concluded.
Russian Central Bank To Use Forex Reserves To Steady Ruble
The Russian government is prepared to use its foreign-exchange reserves to cushion any upward pressure on the ruble, as it closely watches the dollar's fall against the euro, the Financial Times reported on March 1.
Oleg Vyugin, the Central Bank's first deputy chairman, told the FT that the bank was prepared to act to prevent the currency market from "overheating." The country has seen strong interest from portfolio investors, lured by its rising markets and economic potential.
"If there is a big flood of portfolio investment into the Russian market, the Central Bank is ready to use its reserves to sterilize this," Vyugin was quoted as saying.
Gold and foreign-exchange reserves stood at $86.7 billion as of Feb. 20, up $9.8 billion since the start of 2004, thanks largely to high oil and commodities prices, heavy corporate borrowing abroad, and more Russians shifting their savings into rubles away from a weak dollar.
That has propelled the ruble to almost three-year highs against the dollar and forced the Central Bank to contain the rise to help local producers compete with foreign goods.
Vyugin declined to reveal any target rate for the ruble, the paper said, adding, the Central Bank was closely monitoring the dollar. Most of the country's export revenues are in dollars, while half its imports come from the euro zone.
"If we just followed the dollar rate, we could end up with a jump in inflation," Vyugin added. "At the moment, the dollar-euro exchange rate suits us. But if we move substantially, we may review our forex policy."
Japan Dollar Buying More Than DoublesAgain!
Japan's Ministry of Finance announced Feb. 27 that it and the Bank of Japan, in February, sold about 3.3 trillion yen ($31 billion) to purchase dollars in the foreign-exchange market, boosting the year-to-date total to more than 10 trillion yen ($95 billion). This is already about half of the 20.4 trillion yen ($193 billion) sold into the forex market in all of 2003, which itself was three times the annual intervention figure for all of 2002. If this rate were to be continued for all of 2004, it would mean buying dollars on the scale of almost $600 billion.
Japan engaged in large-scale interventions in early February to keep the dollar from collapsing below 105 yen. Despite the fact, that since then, speculation against the dollar has temporarily eased, Japanese interventions have continued more strongly than before, in an attempt to permanently weaken the yen (prop the dollar) at the Y109/$1 level.
A senior Finance Ministry official stressed to Nikkei that moves to weaken the yen (e.g., bailout the dollar) continue, and further interventions will be carried out, if necessary. Tax money allocated for interventions has been exhausted because of the massive yen-selling, but the government will secure a potential of $1.3 trillion (140 trillion yen!) once the fiscal 2004 budget is passed by the Diet in March.
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