US dollar heading for year low and set to drop further

The dollar suffered its largest drop yesterday in a series of daily depreciations that began five days ago and shows now sign of ending soon. The ROL/USD exchange rate fell by 476 to 32,076 ROL/USD, the lowest level since early February. The dollar lost 1,028 ROL in only one week, from an exchange rate of 33,104 ROL/USD.

The depreciation of the dollar in Bucharest was fuelled by the trend in the USD/EUR rate on international markets, where the American currency lost a lot of ground due to concerns about an increase in the US current account deficit and the petroleum price reaching new highs. The National Bank calculates the official USD exchange rate as a function of the EUR/ROL exchange rate on the Bucharest foreign exchange market and the USD/EUR rate on international markets.

The USD/EUR exchange rate increased from 1.2680 at COB on Friday to 1.2780 when markets opened yesterday, in absence of any news from the American economy. The depreciation comes as no surprise, since the rate had broken what was at the time (the final hours of trading last week) the barrier of 1.2670 USD/EUR. The dollar continued to fall yesterday, bringing the USD/EUR rate to a 1.2830 high, only 1% below the historical high of 1.2930 USD/EUR seen in February. The rate had fallen slightly by the end of the day to 1.2780. The performance of the dollar was also hit by the publication of a survey that revealed how analysts expect the data for the trend in consumer confidence and production in the Chicago region to be disappointing.

“Most international opinions point to the all time high of 1.29 USD/EUR being approached again. It’s difficult to know how things will develop in the coming days. Domestically, NBR might not intervene, as it is already worried about inflation given the shift to a policy of inflation targeting. On the other hand, it may no longer have an interest in protecting a high exchange rate, which is good for the foreign investors that sell currency on the days when there is intervention in order to make investments in ROL-denominated financial assets. NBR may stop protecting a support exchange rate, allowing higher volatility of the exchange rate,” explained Cristian Ditescu, a senior dealer from ABN Amro.

Analysts say the National Bank could use the depreciation of the dollar as a vent for the imported inflation that came with the rise in petrol prices, which are dollar-denominated.

Alternatively, it might be waiting for a possible correction of the exchange rate on international markets in order to magnify the impact of any intervention on the market.

If the dollar catches up with the euro, and the central bank takes action to strengthen the European currency, the impact on the currency basket would be much more powerful than in the case of intervention aimed solely at supporting the American currency.
liviu.chiru@zf.ro