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Currency Trends
July 17, 2007

Dollar in the doldrums
As of late last week, the dollar was worth 25.5 rubles, the same as in October 1999.

Moreover, analysts said there was no reason to think that the dollar had yet hit bottom - it may soon slip below 25 rubles.

The dollar faced serious problems during the July 9-13 trading week, struggling to maintain its value against a stronger euro, which was worth $1.38. On July 11, the dollar slipped 21.2 kopecks against the ruble and had lost 30 kopecks by Friday.
This is quite a lot, even in the context of the dollar's recent slide.

Experts chalked this trend up to the global market situation and the reluctance of the Russian Central Bank, the main regulator of the national currency market, to prop up the dollar against the ruble. Russian financial authorities are expected to continue this policy.

US retail sales plunged last week, and the meltdown in the national subprime-mortgage market was back in the spotlight on July 10 when two big debt-rating agencies, Standard & Poor's and Moody's, announced plans to downgrade hundreds of bonds backed by risky home loans. All this scared hedge funds and brokerage firms, leading them to sell dollars.

In the last few months, many central banks have been dumping the greenback for the euro and other hard currencies. Fortunately for the dollar, China, Japan and Russia, which have the world's largest gold and foreign currency reserves, are switching over to different currencies very slowly. However, the influx of extra dollars onto world markets may cause the US currency to plunge still further against the euro and the ruble.

Nevertheless, domestic factors in Russia should also be blamed for the dollar's plunging exchange rate. Experts said Russian financial authorities feared runaway inflation if the Central Bank continued its large-scale currency interventions to hold the ruble down against the greenback.

Valery Mironov, chief economist at the Development Center's economic research foundation, said that April, May and June had seen higher inflation than the same months in 2006. According to Mironov, this increase was the result of a massive influx of foreign capital, rather than wholesale-price growth. Rising Central Bank reserves, which now exceed US$400 billion, also contributed to inflation.

In effect, the Central Bank was forced to buy a lot of dollars in order to keep the ruble from rising. However, inflation increased as a result, and the government may fail to stay within its target of 8% annual inflation by late 2007.

Experts said an inflation rate of 10% could jeopardize the Russian government's national projects, including the provision of affordable housing, in the run-up to parliamentary and presidential elections. According to bankers, it is impossible to provide cheap mortgages when there is two-digit inflation.

In the end, the government will have a hard time trying to curb inflation because
Russia continues to receive more dollar-denominated capital each month and because
Russians no longer trust the dollar.

By Anatoly Gorev, a financial analyst
The opinions expressed in this article are the author's and do not necessarily
represent those of RIA Novosti.

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