The US dollar exchange rate on the world market has reached a ten-month high

The US dollar exchange rate on the world market has reached a ten-month high. Investors expect a further increase in the Fed’s key rate and are assessing the consequences of a possible shutdown. On the Russian market, the movement of exchange rates and the Moscow Exchange index is determined to a large extent by a combination of internal factors. However, over time, the indirect impact may grow through possible decreases in dollar quotations of commodity assets, primarily oil, Russia’s main export product.

The exchange rate of the American currency on the world market on September 25 updated a multi-month high. The DXY index (the dollar against six major currencies) rose to 106.1 points, its highest since November 30, 2022, according to Investing.com. Steady growth has continued since mid-summer, and during this time the American currency has grown by more than 6%, and only since the beginning of September it has added 2.2%.

The dollar strengthened against the backdrop of tough statements from the Federal Reserve following its last meeting and increased risks of a shutdown. Last week, the American regulator, as most analysts expected, left the key rate remains at the same level of 5.25–5.5%, but in the comments he did not rule out raising it before the end of the year.

An increase in the Fed rate and, as a consequence, bond yields and loan rates leads to a deterioration in the credit quality of borrowers and a refusal to renew loans, this is fraught with an increase in defaults and mass layoffs of staff, notes Anton Prokudin, chief macroeconomist of Ingosstrakh-Investments Management Company. Therefore, investors prefer to reduce investments in the most risky assets and move into the US dollar, including US treasury bonds.

On September 25, the yield on ten-year USTs rose above 4.5% per annum for the first time since the fall of 2007, having added more than 40 basis points since the beginning of the fall.

The growth in demand for the American currency, says Sovcombank chief analyst Mikhail Vasiliev, is also facilitated by the risks of a shutdown in the United States. The White House administration may agree to a partial shutdown of the government and all government services if Congress does not have time to agree on a full or short-term budget for the country before the end of the fiscal year ending September 30. Although the US presidential administration regularly faces such risks, and sooner or later congressmen always come to a consensus, each case causes concern among investors and leads to increased interest in the dollar.

Due to the isolation of the Russian market, global trends have a limited impact on it. In particular, on the foreign exchange market, the exchange rate of the dollar on the Moscow Exchange even dropped during Monday’s trading by 33 kopecks, to 95.92 rubles/$, and at the end of the day stopped at a level close to Friday’s closing value of 96.24 rubles/$. $. Since mid-summer, the exchange rate has increased by more than 6 rubles, which was due to a shortage of foreign currency against the backdrop of a decrease in foreign currency entering the country from exports and high demand for it from foreign companies and investors leaving the country, as well as high activity of speculators.

A similar picture was observed in the stock market. The Moscow Exchange index fell by 0.12% on Monday to 3,045.29 points, but grew by more than 5% in two and a half months. The limited impact is due to the weakness of the ruble, reinvestment of dividends received from large Russian companies, and rising oil prices. Even taking into account the fact that quotes for North Sea Brent oil fell by 0.4% on Monday, since mid-July it has risen in price by more than 14%, to $93.2 per barrel.

However, if the Fed raises the rate and keeps it at a high level for a long time, the Russian market may also suffer, analysts say. As Mikhail Vasiliev notes, maintaining high rates for a longer period of time could put pressure on the US economy and increases the risks of a global recession. This will lead to a fall in prices for Russia’s main export commodity – oil. “At the end of 2022, 41% of budget revenues consisted of oil and gas revenues, so oil prices directly affect the economic situation in Russia,” notes Digital Broker analyst Daniil Bolotskikh. According to Mr. Vasiliev, the decline in prices for Russian raw materials is negative for the ruble exchange rate, inflation and interest rates in Russia.

Vitaly Gaidaev