[OPE-L] Russian Central Bank Switches to Euro-Dollar Basket

From: glevy@PRATT.EDU
Date: Mon Feb 07 2005 - 18:18:51 EST


Russian Central Bank Switches to Euro-Dollar Basket in
Targeting Ruble


Russia's central bank said on Friday it had begun
targeting the ruble's nominal exchange rate against
the euro as well as the dollar, the Reuters news
agency reports. The shift is meant to bring currency
policy more in line with trade flows.

The Bank of Russia said in a statement it had begun
targeting a dual currency basket  made up of 90 U.S.
cents and 10 euro cents  as of Feb. 1 and would
gradually raise the weighting of euros.

"Increases of the weighting of the euro in the twin
currency basket, to a level appropriate for the task
of exchange rate policy, will take place step-by-step
as market players adapt," the statement said.

The announcement completes an informal shift
undertaken by the central bank last year, when it was
forced by market appreciation pressures to abandon a
de facto nominal peg of the ruble to the dollar and
allow it to rise.

The greenback's weakness on global currency markets,
as well as Russia's oil-driven current account
surplus, have led central bankers to say they were
looking more at the euro as a guide to day-to-day
exchange rate targeting.

The central bank said it would continue its "managed"
float of the ruble - policy jargon for market
intervention - to smooth out excessive volatility and
maintain the stability of the ruble.

Dealers said the statement triggered dollar selling on
the local currency market. One said the policy shift
would help stop the ruble being buffeted by sharp
euro-dollar moves, although other dealers remained at
a loss over the practical impact.

"We still don't really understand what it means," said

The new twin basket applies to the nominal exchange
rate of the ruble.

Russia's central bank also targets the real effective
exchange rate of the ruble, adjusted for inflation
against a trade-weighted basket of currencies, as a
benchmark to measure economic competitiveness.

It was also not immediately clear whether the new twin
nominal basket would lead Russia to raise the
weighting of euros in its gold and foreign exchange
reserves, which hit an all-time high of $128.3 billion
as of Jan. 28.

Russia's reserves are the sixth largest in the world
- and the largest outside Asia - and any news on
whether the share of euros may rise is enough to move
the euro-dollar exchange rate, dealers say.

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