The feast of cheap and limitless liquidity could not avoid interfering with the international currency market. While in the first six months of the year the crisis was beneficial for the US dollar, in the second half of the year speculators took it out on the dollar over and above. This year is expected to continue weakening of the American currency that dropped to the level of $1.6 for one Euro in 2009.
After the plunge of the Euro in the beginning of 2009 (over 9% in the first two months), the trend changed in March. As a result, within the year the Euro grew by over 10% and reached the remarkable level of $1.5 for one Euro.
This tendency concerns Euro region officials worried about the economic growth of the region. European companies are also concerned with the current state of affairs in the foreign currency market since they think that the level of $1.5 for Euro is the pain threshold for the export-oriented European corporate sector.
According to analysts of Kalita-Finance, for these companies, expensive domestic currency is an export tax of sorts that compromises competitiveness of European goods outside of Europe.
Since March 2009, the dynamics of the currency market was predetermined by the US Federal Reserve System. Regulators made a decision to take non-traditional measures in support of the financial system. Experts say that the measures were boiled down to pumping the bank system with freshly printed dollars.
At its March meeting, Federal Reserve made a decision to start buying out treasury bonds for $300 billion (private monetization of debt). To this sum, they added $1.25 trillion under the program of bonds acquisition and $175 billion for acquisition of agency bonds (bonds issued by a US government-sponsored agency).
Despite the Federal Reserve efforts to pump the financial system with liquid assets, the banks are not willing to credit the real sector. Financial institutions prefer to accumulate the funds generously provided by the Federal Resetves. As a result, the volume of excessive reserves of American banks reached record high levels and exceeded the mark of one trillion dollars.
“Additionally, according to the statements made by the Federal Reserve representatives, the regulator is not going to withdraw excessive liquidity and raise interest rates in the next few quarters. This suggests further growth on financial playing fields. Regardless of the statements of Trichet, Bernanke, and Geithner about necessity of the “strong dollar,” the players will still sell American currency in search of profit,” experts believe.
According to the analysts of Kalita-Finance, there are a number of factors that instigate the demand for the European currency. One of them is vulnerability of the financial sector of the currency block. European banks are the main creditors of the most problematic economies of the EU, i.e., Eastern European countries (including Baltic countries and the Balkans) and some of the countries of the Euro region (Greece, Portugal). The total sum of debt of this category of countries is over $2 trillion.
Considering the current economic state of affairs in these countries, solvency of these countries is very doubtful. Recent drop of Greece’s rating and the incident with the Dubai state company financed mostly by European banks is another evidence of high credit risks for the European financial system.
Many European banks take various measures to strengthen their capital base, including repatriation of the foreign assets. This created additional demand for Euro.
“We believe that in the first six months of 2010, Euro will reach the range of $1.55-$1.60. Then, dollar may win its position back due to completion of the Federal Reserve stimulation program and a possibility of an increase of the interest rates. In the second half of the year, the exchange range will be at the level of $1.40-$1.50 for one Euro,” the experts believe.
Dynamics of the Russian currency deserves special attention. After the “controlled devaluation” with the exchange rate of 36 rubles for a dollar, the ruble began to strengthen gradually.
In spring of 2009, the Bank of Russia had to buy foreign currency from the market, restraining rapid strengthening of the ruble. However, by the mid fall the US dollar dropped to 29 rubles.
At the same time, the players were not able to keep the rate lower than that mark due to several reasons.
“First of all, by the end of the year the Central Bank determined new fluctuation trading band for bi-currency basket (35-38 rubles). The regulator intends to stick to this trading band. Many players in the internal market understand that these intentions make further games for devaluation of the dollar pointless and choose the way of least resistance, changing the strategy and betting on the US dollar,” the experts explain.
External affairs were beneficial for the change of trends. Considering the technical default of the Dubai fund and changes in the ratings of the number of countries, supporters of short positions began closing dollar transactions, including rubles cross-rates.
The events occurred concurrently with the traditional growth of liquidity in Russia in the end of the year linked to increased budget spending. As a result, there are more than enough rubles in the Russian bank system. This caused loss of interest in the Russian currency and increase in demand for the US dollar. In December, the dollar exchange rate increased to over 30 rubles for a dollar.
“Yet, the current sharp drop in the ruble exchange rate is likely temporary. Internal seasonal and external factors temporarily diverted the Russian currency exchange from the growing trend,” the experts believe.
“While the world markets are relatively stable, and cheap liquidity continues to search for profitable assets, speculative interests towards the Russian ruble will remain. Beneficial price situation in raw materials markets will facilitate the growth of the Russian currency. Further inflow of oil dollars and “hot” money in the first six months may “push” the US dollar to the level of 28 rubles for a dollar. If the Euro reaches $1.6 at Forex, the dollar may reach the range of 27.0-27.5 rubles in the Russian market. In the second half of the year the Russian ruble may find itself at the same level we currently observe, i.e. 30 rubles for a dollar,” the experts concluded.