The dollar has ruled the world – Newspaper Kommersant No. 178 (7379) of 09/27/2022
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The dollar exchange rate has updated a 20-year high on the world market. The strong positions of the American currency are associated with fears of a global economic recession against the backdrop of the Fed’s plans to raise the base rate to the values that preceded the 2008 crisis. In Russia, the dollar rose symbolically, due to the toxicity of the currencies of “unfriendly” countries, they are no longer in great demand, and the offer remains high thanks to a positive current account.
According to Investing.com, on September 26, the DXY index (the dollar exchange rate against six leading currencies) rose to 114.5 points – the highest value since May 15, 2002. This is 1.3% higher than last Friday’s close. The euro fell 1.2% to $0.9569, the lowest level since June 19, 2002. The pound sterling was the leader of the fall, the rate of which fell by more than 4% to $1.0384, thus updating the historical low set in 1985.
The strengthening of the dollar is taking place against the backdrop of the Fed’s tight monetary policy. Last week the American financial regulator announced about raising the rate by 0.75 percentage points to 3-3.25%, which coincided with market expectations. At the same time, the regulator worsened its forecasts for the economy and inflation for 2022–2023, and also tightened its rhetoric regarding the prospects for monetary policy.
The Fed’s median forecast now calls for a rate hike to 4.4% by the end of this year and to 4.6% in 2023.
“If earlier the limit of the base interest rate was 4%, now investors should get ready for 4.5–5%, which causes the growth of the US currency,” said Vladimir Evstifeev, head of the analytical department of Zenit Bank.
The Fed’s tight policy raises the likelihood of a more severe recession in the US and global economies. “This is negative for all risky assets, including commodities, including oil and gas,” explains Mikhail Vasiliev, chief analyst at Sovcombank. “Periods of global instability almost always force investors around the world to redirect currency flows into the dollar and protective assets, which are considered US Treasury bills,” adds Vladimir Evstifeev.
At the same time, the rapid growth of the dollar exchange rate had only a limited impact on the Russian foreign exchange market. During trading on the Moscow Exchange, the dollar rose by 1.3 rubles to 59.24 rubles/$, and ended the main session near the mark of 58.4 rubles/$. Even with the rise, it remained near the two-month low set the day before.
The ruble is isolated from the dynamics of reserve currencies by external and internal restrictions on the movement of capital, explains Vladimir Evstifeev. Therefore, it is determined by the balance of domestic demand and supply of currency.
“The Russian currency is receiving significant support from the current account surplus. Thus, in January-August 2022, it amounted to $183.1 billion, which is three times higher than last year,” says Polina Khvoynitskaya, head of investment strategy and analytics at Expobank.
The correction of the dollar exchange rate took place at a reduced activity of bidders. According to the Moscow Exchange, the volume of transactions with the dollar for delivery “tomorrow” did not reach 100 billion rubles, while on Friday it exceeded 147 billion rubles. This may be due to a decrease in the supply of foreign currency from exporters – on Monday they completed the payment of basic taxes (VAT, MET and excises).
In the past, a decrease in the supply of currency caused a more pronounced increase in the dollar, but against the backdrop of increased geopolitical risks, interest in the currency is minimal.
“The risks of Western sanctions on the NCC are growing, which makes non-cash dollars and euros even more toxic and encourages Russians to get rid of the currencies of “unfriendly” countries,” explains Mikhail Vasiliev.
Analysts do not rule out a further rise in the dollar in the world as the Fed tightens its policy. But even in the event of a global recession and Western sanctions, the current account of the Russian Federation, according to Mikhail Vasilyev, will remain in surplus in the coming months and years, which, together with severe capital restrictions, will keep the ruble stable. He admits that in the coming weeks the dollar may return to the level of 55 rubles/$.
The launch of a fiscal rule may prevent this, although the size of potential purchases of the currency of “friendly” countries will not be as significant as previously expected by market participants. Additional excess budget revenues, believes Polina Khvoynitskaya, will most likely be used to finance current needs, and not to purchase the currency of “friendly” countries.
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