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Currency Market: New Challenges
Veaceslav Negruta, 1 December 2004
The evolutions on the internal currency market at the end of November gave a lot of headaches to the local economic agents, especially to those whose activity depends directly or indirectly on Moldovan Leu's correlation with other foreign currencies. The US Dollar's spectacular fluctuations against other foreign currencies put financial markets and analysts on fire, also testing the nerves of some actors on the local market.
The Dollar's latest significant "fall" took place on Wednesday and Thursday, on 24 and 25 November, as a result of the declarations of some officials of the Central Bank of Russia about their intentions to increase the share of the Euro in the structure of its currency reserves from 30 to 40 percent in the Dollar's disfavour. The international financial market reacted promptly. China had previously announced its preferences for the Euro, which also troubled the waters on the financial markets.
However, the main reason for the Dollar's "fall" should be looked for in the USA. Probably many actors that play on the currency market have realized that the USA is interested in the Dollar's weakness in order to finance partially its war costs, finance the huge budget deficit and create competitive advantages on the internal and external markets for the American producers. The contradictory statements of the Minister of Finance and the Head of the US Federal Reserves with regard to the Dollar's future amplify these uncertainties. Moreover, the fears related to the high levels of both trade and current account deficits of the United States have generated a decreasing trend of the American currency. Monetary markets fear now that the decline that has been taking place so far gradually and orderly could become chaotic, with unpredictable consequences.
The hardest blow to the US dollar could be caused by the entering into force of the agreement of December 2003 between the German Chancellor Gerhard Schroeder and the Russian President Vladimir Putin regarding the payment in Euro for the import of Russian natural gases. Respectively, there could take place an unprecedented replacement of the US Dollar with Euro in the energy resources import/export transactions, this segment of the international market being traditionally dominated by the Dollar. The decision of the Central Bank of Russia to increase the share of the European currency in the total amount of its currency reserves is an alarming signal for its energy sector.
In case of US Dollar's depreciation, a new wave of price hike on energy resources is not excluded, or a more accelerated substitution of the Euro for the Dollar could become reality. Let us take a look at the Moldovan currency market. Although the Dollar loses its position and value on all international and national markets, the Leu/Dollar correlation remains relatively stable, even with a small depreciation of the Leu. This could be explained by the seasonal factor i.e. that the demand for dollars increased on the eve of winter (we must pay for the import of energy resources). But this explanation is not sufficient. It seems that the target for Leu's appreciation against the Dollar was set by President Vladimir Voronin at the Government meeting of 3 November 2004, when he brought harsh criticism to the National Bank and personally to its Governor Leonid Talmaci.
The Head of the State harshly criticized the activity of those NBM officers that allowed for Leu's appreciation, although the appreciation took place 5-6 months before. Back then, when the exporters and the population dependant on the external money transfers were suffering losses due to the Leu' appreciation, few were those that criticized the situation on the currency market (nobody at all from among the governors). For these reasons, the President's criticism was a little belated. Nevertheless, the criticism had its effects: today the Moldovan currency market does not react in the same way as practically all international and national markets do to the Dollar's evolution.
In the conditions in which the dollars are "thrown out" from international assets in the entire world, the Republic of Moldova becomes the place that absorbs the Dollar. The dollar throwing out phenomenon is obvious especially in Russia. Thus, those dollars could reach Moldova through economic agents, including commercial banks, which could bring about a new wave of pressure on the Leu/Dollar correlation.
It is important to understand the macroeconomic impact of the evolutions on the international currency market on Moldova's balance of payments. In the conditions in which most export contracts have prices fixed in Dollars, and import prices (except energy resources) in Euros (or related to the Euro), we have an increasingly disastrous situation with regard to the trade balance. Its deficit is continuously growing, especially due to the depreciation of the Dollar against the Euro. And the consequences of Leu's appreciation allowed for an increase in the trade deficit, which registered a record amount of USD 515 million in the nine months of this year, as well as an increase in the current account deficit.
At the same time, controlled currency regime (promoted, in fact, by NBM) has protected the internal currency market against the speculative flows and the multitude of negative evolutions on the international financial markets. NBM should change the frequency of its interventions on the currency market and offer an increased flexibility to the exchange rate. It is true that there is the option of using temporary controls, such as minimal obligatory reserves or restrictions in the loan provision policy. Perhaps the market players know them and are aware of what measures the central bank could adopt, should things go wrong at some point.
The Republic of Moldova is approaching more and more to the critical point when it must take a decision regarding the acknowledgement and acceptance of the increasing role of Euro in the world as well as in the Republic of Moldova. The delay in doing this has already degenerated in "missed opportunities". The current political and economic contexts will most likely not interfere with making such a decision.