USD may see more downward pressure..

[MikeZ]

Russia to join anti-dollar game


October 22, 2003 Posted: 10:57 Moscow time (06:57 GMT)

MOSCOW - Russia plans to cut the share of US dollars in its reserves and increase the share of euros, Senior Deputy Finance Minister Alexey Ulyukayev said on Tuesday. According to him, the necessity of this measure is connected with the important role of the European market for the Russian economy and with the weakening of the American currency on the international market. The percentage of dollars in the currency reserves will be reduced by 3-5 percent, and the share of euro reserves will be increased by the same amount, Mr. Ulyukayev told the Bloomberg agency.

Four years ago, dollar reserves made up 90-95 percent of Russia’s foreign currency reserves. At that time, the Central Bank’s leadership did not plan to increase it significantly. Two years ago, the former Chairman of the Central Bank Viktor Gerashchenko said that only 5 percent of the country’s reserves were in euros. According to him, there was no need to increase this share, as the bulk of foreign trade payments was made in dollars.

But the Central Bank’s new team has broken this mold. The bank’s Chairman Sergey Ignatyev has recently reported that 70 percent of the reserves were in dollars and 25 percent in euros. The Russian gold and foreign currency reserves were $63.5bn as of October 10, including $58.3bn in foreign currency reserves.

Generally speaking, the main purpose of foreign reserves kept in the central bank of any country is to serve the needs of foreign trade and ensure the stability of the national currency. According to the State Customs Committee, EU countries accounted for 35.9 percent of Russia’s foreign trade in January-August 2003, about 1.5 percent less than last year, mainly due to the reduction of exports.

However, it should be noted that most of Russia’s exports to the European Union are raw materials, with prices fixed in dollars. Given this, the share of euros should be at least twice as low. The situation on the Russian foreign exchange market confirms the stability of this indicator, even if indirectly. The number of ruble/euro deals is many times lower than the number of ruble/dollar deals. And the ratio does not change. Thus, a conclusion can be made that 90 percent of export proceeds subject to obligatory sales are in dollars, and the demand for euros from importers does not exceed EUR 150m to EUR 200m a month.

Another reason for increasing the share of euros in the Russian gold and foreign currency reserves might be the desire to harmonize the structure of the reserves with the structure of Russia’s external debt. But the required balance has almost been achieved. According to the Finance Ministry, the euro-denominated part of the Russian foreign debt makes up about 28 percent. About 70 percent of the debt is denominated in dollars. Due to Russia’s significant debt payments to the Paris Club of creditors, the share of euro-denominated obligations is likely to decrease slightly by year-end.

We can only assume that the Finance Ministry fears that the dollar will continue falling on the international exchange market. Since the start of the year, the American currency has weakened against the euro by about 10 percent, and, according to some forecasts, this tendency will continue. However, it is not ruled out that the Finance Ministry’s statements are part of its anti-dollar game. The positions of the dollar and the euro are determined by the demand for this or that currency in international payments and, accordingly, the demand from national central banks.

Meanwhile, the Central Bank of Russia may have its own opinion on the ratio of foreign currencies in the reserves. In September, Senior Deputy Chairman of the Central Bank Oleg Vyugin said that the Central Bank was not going to introduce serious changes to the structure of the country’s gold and foreign currency reserves. “Our currency policy is not based on the exchange rate of the main currencies, and we don’t speculate on the exchange rate. That is why any change in the euro/dollar exchange rate does not prompt us to change the currency structure of the reserves,” he stressed.

http://www.russiajournal.com/news/cnews-article.shtml?nd=40945

[mishak]

nice point, MikeZ

However Russia is not such a big deal comparing the big currency reserves holders (approximate figures in bil.$):
550 Japan
350 Eurosystem
320 China
180 Taiwan
130 South Korea
110 Hong Kong

I guess Japan and China already have 30% of foreign currency asssets in Euro.
On the other side, ECB do not have any Euro at all.

I wait when the oil will be priced in Euro globally

[MikeZ]

Originally posted by mishak
nice point, MikeZ

However Russia is not such a big deal comparing the big currency reserves holders (approximate figures in bil.$):
550 Japan
350 Eurosystem
320 China
180 Taiwan
130 South Korea
110 Hong Kong

I guess Japan and China already have 30% of foreign currency asssets in Euro.
On the other side, ECB do not have any Euro at all.

I wait when the oil will be priced in Euro globally

Agreed, Russia is not the largest holder but may be a trend setter. China is a considerable wildcard.

In addition most of the oil is priced in USD for now, but this may also be changing. Iran approved pricing its exports in Euro's not sure if it is in effect yet. Venezuela is looking towards the same pricing instead of commodity payments. Iraq was going to do the same (assuming any sanctions were to be lifted and no war to have taken place). Now under US/British control it may provide a stabilizing factor for USD at least for now.

US consumes about 50% of total world energy, so pricing energy imports in anything besides USD may and up placing additional downward pressure.

Markets are interrelated. Our domestic policy may effect our equity, and credit/debt markets but it may not be as effective on the Global Scale, at least not as much as it used to.

The following article has some interesting points on domestic and global markets, equity, credit, debt, and currency implications. The commentators may have a bearish bias, but most of the facts sited speak for themselves.

http://prudentbear.com/archive_comm_article.asp?category=Credit+Bubble+Bu lletin&content_idx=27650

few excerpts:


October 22 – Bloomberg: “China raised almost $1.5 billion in its first overseas bond sale in two years, luring investors with the promise of the world’s fastest-growing major economy and record foreign currency reserves. China sold $1 billion of 10-year dollar bonds at a yield of 53 basis points more than U.S. Treasuries of similar maturity, lower than the earlier-planned 55…

Oct. 21 (Bloomberg) -- Yukos, Russia’s biggest oil producer, kept more cash this year in Russian rubles and ruble-denominated securities rather than dollars, as its home currency heads for its first-ever yearly gain against the dollar. ‘This year we have been keeping a larger portion of our investment portfolio in rubles than what we had in the past, simply because of the appreciating ruble,’ Bruce Misamore, Yukos’s chief financial officer, told reporters in Moscow. The Russian currency has gained 6.8 percent against the dollar this year…”

It has been fascinating to witness truly historic financial evolution over the past decade. I have often attempted to explain how the Fed, GSEs and Wall Street have evolved to the point of having mastered the art of liquefying the market-based U.S. Credit system – Liquidity on Demand in Grand Excess. The nexus of this unparalleled power lies in the capacity for virtually unlimited GSE liability creation – insatiable demand for (implicitly guaranteed) GSE debt that can be issued in gross excess with no impact on perceived creditworthiness or investor demand (the “moneyness” of GSE liabilities); the Fed’s capacity/audacity to peg short-term interest rates significantly below market rates; the explosion of aggressive leveraged speculation; and, of course, the dollar’s role as international reserve currency. These provided a confluence of powerful forces unlike anything experienced in monetary or financial history.



This monetary/liquidity mechanism gained deserved credibility from rectifying the tumultuous market episodes of 1994, 1998, 1999, 2001, and 2002 experiences. Over the past several months, this “mastery” has been absolutely flaunted. Credit, liquidity and speculative excesses were taken to a whole new level. Interest rates began to shoot higher in July. Quickly, the highly leveraged and speculation-rife bond and interest-rate derivative markets faltered in near dislocation. But from July through September, Fannie and Freddie expanded their mortgage portfolios by the then unprecedented $160 billion (compared to the 2nd quarter’s $13.3 billion increase). Problem “resolved.”



It is worth briefly rehashing the dynamics of GSE “liquefication.” Today, the system is acutely vulnerable to rising interest rates. For one, we face unprecedented leveraged speculation that would be forced into problematic liquidation in the event of a significant and sustained rise in interest rates. Second, there is great systemic risk associated with asset Bubble dynamics (especially throughout mortgage finance) and exceptionally weak debt structures after years of poor and excessive lending (Minsky’s “Ponzi Finance”). Third, there is this incredible interest-rate derivatives monster that expands with each new day of Credit and speculative excess. The GSEs, speculators, and other financial operators have purchased derivative protection against rising rates. Sellers of unfathomable quantities of “insurance” must “dynamically hedge” their exposure in the event of rising rates -- they are forced to sell/short Treasuries, agencies and other debt instruments into a declining market to establish positions that would generate the required cash-flow to pay Fannie, Freddie and all the rest in the event of a sustained jump in rates.