Ruble’s Rally Stumbles After Interest-Rate Cut

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Before latest central bank intervention, Russian currency ranked as best performing major currency this year

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The ruble’s fall marks the latest saga in a whirlwind year of trading for the Russian currency, which collapsed in the days after Russia invaded Ukraine – only to recover with blistering momentum. After weakening to a record intraday low of about 158 ​​rubles per dollar on March 7, a series of maneuvers by Russia’s central bank, coupled with the country’s large export business, helped engineer the ruble’s rebound.

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However, soon after, the country faced a surprising dilemma. Western sanctions on Russia were beginning to have a huge impact on the country’s economy. The ruble became the best performing currency in the world against the dollar this year, according to Dow Jones Market Data analysis of 56 currencies. A strong ruble threatens to hit the country’s budget by undercutting the value of oil and gas tax revenues denominated in dollars.

To counter a rising ruble, Russia’s central bank began cutting its key interest rate in April, reversing its decision to raise the rate to 20% in February following Russia’s invasion. It wasn’t until Thursday, when the central bank cut the key interest rate for the third time – bringing it to 11% from 14% and bringing it closer to its level before the war – that the ruble’s rally finally broke.

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The ruble recently traded at about 68 rubles per dollar, having pulled back this week after consolidating to about 55 rubles per dollar.
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Still, it is trading up about 135% from its low in early March following Russia’s invasion of Ukraine. It is now up nearly 11% this year, making it the third best performing currency this year, analysis of Dow Jones market data shows, surpassing the Brazilian real and the Uruguayan peso.

Even with the recent fall of the ruble, traders, strategists and economists say it is difficult to determine a fair value for the Russian currency. Few investors have been trading the ruble since the war, and trading volume has become difficult to understand. Many say its rebound this year has been largely artificial.

“It’s not a reasonably liquid market that we’re seeing,” said Jane Foley, head of forex strategy at Rabobank. “We have to keep in mind that there is thin liquidity here, and when we have thin liquidity, we tend to have large market volatility.”

The central bank’s moves to cut the country’s key interest rates have made the ruble less attractive. Another move to weaken the currency was the easing of regulations that required exporters to convert 80% of their foreign exchange revenue into rubles. The number has been reduced to 50 per cent.

Russian President Vladimir Putin has also called on European countries to pay for natural gas in rubles.

Even with a weakening ruble, Russia’s economy still faces growing economic issues. The shortage has led to rising inflation in Russia and the country is facing rising costs from the war in Ukraine. Economists expect the Russian economy to shrink by about 10% this year.

Write to Caitlin McCabe at [email protected]

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