Russia said yesterday it had abandoned efforts to tie the rouble's movement closely to the dollar and switched to shadowing both the euro and the US currency.
The move heightened expectations that other countries operating de facto dollar pegs, such as China, could follow suit.
With 81 per cent of Russia's oil exports currently sold to Europe, the move also provoked fresh speculation that Russia could decide to denominate its oil in euros. Russia is the world's second-largest oil exporter, behind Saudi Arabia.
"Russia has talked about the idea of pricing its oil in euros. If it is starting to put more weight on the euro in terms of its forex regime and reserves, then that speculation will be re-ignited," said Ian Stannard, currency strategist at BNP Paribas.
Russia had announced its intention to introduce a basket arrangement last April but did not set a firm date for the change. The Bank of Russia, the central bank, has been building its euro reserves in readiness, with some 30 per cent of its reserves now estimated to be in euros, against just 5 per cent in 2000. Traders said it appeared Russia had begun to loosen its peg to the dollar in October, when the rouble began to strengthen against the dollar while the US currency fell strongly against the euro.
The bank yesterday indicated that its efforts to keep the rouble closely pegged to the dollar had caused the Russian currency to suffer against the strengthening euro, rendering the old policy "inexpedient".
The rouble has fallen by 30 per cent against the euro since January 2002, fuelling inflation in a country that conducts about 65 per cent of its trade with the eurozone.
"The rouble's performance has been highly correlated with the dollar. Now it will be more aligned with the euro," said Paul Timmons, economist at Moscow Narodny Bank.
He added that the new policy would help Russia move towards a free float of its currency in 2006, a target set by President Vladimir Putin.
This euro weighting will be increased in future to "a level that corresponds to [the] tasks of the exchange rate policy", leading some to conclude that the euro could ultimately account for 65 per cent of the basket, prompting a further re-balancing of Moscow's $128bn (€99bn, £68bn) of gold and forex reserves.
Julia Tsepliaeva of ING Financial Markets said that with inflation currently running at 11.7 per cent, Russia had been forced to stem rouble weakness in order to meet its 2005 inflation target of 8.5 per cent.
Moscow's move illustrates the growing global importance of the euro at a time when a number of central banks have been shifting reserves out of the dollar into the shared European currency.
"It is symptomatic of a global trend and reflects the growing international role of the euro," said Ralph Sueppel, head of emerging Europe strategy at Merrill Lynch.
"It is beginning to take its place in portfolios."
The Bank of Russia said it has been using a basket consisting of 0.1 euro and 0.9 dollars to target exchange rate policy since February 1. With the euro trading near $1.30, this currently gives the euro a 13 per cent weighting in the basket.
Reason why it looks meaningful in terms of today's debate is that the arguments reflect today's news much as they did the news of October 2003.
With respect to the article you post in #48, from a trading perspective, the Russian's timing is bad however the reason they have done it is substantive rather than relative value of the currency.
At the moment, it still appears that the dollar is rallying against the Euro--the charts against the Euro are particularly impressive; the dollar is clearly in an uptrend; as it appears to be against the Yen, C-Dollar, and pound. As for real money, it looks as though gold is going down against the dollar also.
Two meaningful questions of the day: Why; and How Long?
Although the fed continues on its path of increasing the fed fund target rate (now 2.5%), long rates are declining. However the short rates may be having a positive short term impact on dollar exchange values.
The How Long question I think is ultimately determined by the answer to the Why question. If the dollar is firming up because of interest rates, the period will be relatively short. Even if there is a coordinated intervention coupled with interest rates, the dollar is still in a long term downtrend.
On the other hand, as you suggested somewhat earlier on this thread, if we have a deflation in which debts are liquidated by bankruptcy, default, or repudiation, the underlying value of the dollar might go up on a sustained basis.