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#10 - JRL 7230
Moscow Tribune
June 20, 2003
Has it reached equilibrium?
By Stanislav Menshikov

When George Soros recently visited Moscow, he was naturally asked what he thought about the prospects for the US dollar. The renowned speculator-philanthropists kept his cards to his breast but was understood to infer that the US currency would hardly fall below $1.2-1.25 per euro by the year's end. If that is correct, the dollar is near its trough.

We cannot know exactly what this prediction is based on. But we do know that the current long-term fall of the US dollar is the result of a rather peculiar combination of factors. One of them is the prolonged international business recession that put an end to the spectacular boom in the financial markets of the US and Europe. While business is equally slow all over the industrial world, the New York market is by far the largest, and stagnation there hits the dollar much harder than recession elsewhere affects the euro and the yen.

With a close to zero interest rate America is not an attractive place to invest short-term money right now. But even the slightest hints of a US industrial recovery tend to trigger upward spurts in the Dow Jones and Nasdaq indices and cause the dollar to start breathing more normally. Economic news in Europe and Japan is more bleak. Chances are that economic recovery, if it comes at all soon, will start in the US rather than in other places. If that happens, the dollar is bound to recover from its current plight.

The other reason for the dollar's fall is that the euro is slowly gaining its place as a world currency. As the recent report of the Bank for International Settlements in Basle shows, the share of commercial bank loans and deposits denominated in euros is rising much faster than of those in dollars, pounds sterling, yens or Swiss franks. This is happening not only in Europe, but also in Third World countries and even in Latin America. How long this trend lasts is anybody's guess. However, if European business remains stagnant euro's expansion will tend to subside in the coming months.

The dollar's fall was assisted by signals that the US administration needed a weaker currency in order to boost US exports and support the economy. Recently George W. Bush made statements to the contrary. As it turned out, the dollar fell largely against the euro but much less so against the yen and other currencies. Therefore, dollar's devaluation did little to help US exports but it led to higher import prices. Consequently, there was no improvement in the US trade balance and its deficit remains too high.

On the other hand, European exporters are complaining of losing markets due to an overpriced euro and are pressing monetary authorities to stop its appreciation. Some European exports have gained at the expense of US producers (consider recent Airbus success against loss of sales by Boeing). However, that is more the result of a politically-inspired run away from American products than a casualty of the currency wars. The recent UK decision to postpone the country's transition to the euro supports the view that euro is not as strong as it might seem.

All factors considered, the dollar might have indeed hit the rock bottom, as Soros seemed to infer. What, in anything, this could mean for the Russian economy?

First, monetary authorities have been belatedly cutting losses by diversifying currency reserves and moving more into euros. But there is a natural limit to that transition. A large part of Russian exports is in oil and paid for in dollars. While exporters are no longer obliged to sell their dollars to the central bank they continue to do so in order to cover their rouble costs. This leads to an appreciation of the rouble against the dollar and to less competitive power for the exporters.

Former central bank president Viktor Geraschenko believes that the dollar is worth only 15 to 16 roubles in terms of purchasing power parity. But financial authorities will never attempt to drive the dollar so far down in fear of antagonising the powerful oil and metals oligarchs.

Second, Russian companies and private citizens are currently converting their dollar savings into roubles, which now bring a higher real return. Stashing money abroad has also decreased due to lack of profitable investment instruments. But that is also true of euros. Interest rates in the dollar and euro zones are so low that it is more profitable to borrow there than to invest.

Third, dollar depreciation is promoting domestic inflation. That is because retailers are silently changing their "conditional units" ("uslovnuye yedinitsy") prices from dollars to euros which means a rouble price hike of 17-20 percent. Similarly, all recipients of dollar payments (for instance, in real estate rents) are losing money due to dollar depreciation against the rouble.

All told, the fall of the dollar is more a loss for Russia than a gain. Stabilisation at today's level and a return to an approximate balance with the euro would be in Russia's best interest.

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