Ukraine’s national currency, the hryvnia, strengthened significantly against the US dollar in recent in recent days to as much as Hr 4.70 per $1.
Ukraine’s national currency, the hryvnia, strengthened significantly against the US dollar in recent days, fueling speculation from local bankers and observers the National Bank of Ukraine (NBU) is allowing appreciation to cushion the blow of growing inflation.
Ukrainians were surprised on March 23 to see the hryvnia strengthen overnight from a rate of Hr 5.05 to $1 to as much as Hr 4.70 to $1. The NBU’s official exchange remains fixed at Hr 5.05 to $1, where it has been since spring 2005.
The hryvnia strengthened because the NBU chose not to intervene late last week following heavy currency inflows, particularly in US dollars, analysts said.
“This kind of artificial hryvnia deficit helps calm inflationary pressures in Ukraine,” said Oleksandr Zholud, an economist at the International Centre for Policy Studies in Kyiv, financed by George Soros’ Open Society Institute.
Surprised by the NBU’s move not to soak up the additional US dollars, banks and currency traders also backed off, causing demand for the hryvnia, and its value, to appreciate relative to the US dollar and other foreign currencies, observers said.
Throughout the dollar’s 14-month decline against the euro, Ukrainian government finance officials assured the public it would not change the exchange rate.
The dollar’s fall on the Ukrainian market is a short-term process, Zholud said, and the exchange rate will return to the fixed rate in several weeks.
Others said the NBU could change its policy.
“In our view, the fact that the NBU ignored such a move may show its commitment towards band widening (beyond Hr 4.95 to Hr 5.25 per $1) this year,” said Daria Volchenko, an ING analyst in Kyiv, who forecast an exchange rate of Hr 4.95 per $1.
The NBU predicted inflation to reach 15.5 percent in 2008, while official statistics show the consumer price index rose 5.7 percent in the first two months and expected to peak in April and May.
Analysts provided different explanations for the vast inflow of foreign currencies, particularly the US dollar.
“We think the drop was partly the result of households selling foreign currencies, which accounts for almost half of their savings,” Renaissance Capital said in a March 25 report. “Temporary and technical money market factors are also visible.”
Analysts said strengthening the domestic currency would alleviate price increases for natural gas imports paid to Russia’s Gazprom in US dollars by state energy company Naftogaz Ukrainy.
