China Promotes Yuan and Russian Ruble Weakens

Posted July 14, 2009

China is tightening monetary policy in order to make the yuan more attractive as a currency reserve for trade settlements. Russia lowered its benchmark interest rate again in the hopes of stimulating lending. Poland's government and central bank are at odds over the use of bank profits for lowering budget deficits rather than being held as a currency reserve.

 

China is expected to continue an expansion of a program of trade settlements that rely on the yuan instead of the US dollar.  The country is focusing on tightening its monetary policy in order to make the currency more stable and more attractive to global investors.  The goal is to continue movement towards global adoption of a multi-currency reserve and reduced dependence on the US dollar for trade transactions.

Trade agreements relying on the yuan for account settlement will enable exporters to lower their transaction costs and variability.  China is also loosening its currency restrictions and analysts predict the yuan will appreciate during the 4th quarter of 2009.

Currently the yuan is at 6.8334 yuan per US dollars.  China’s benchmark interest rate is at 5.31 percent.

Russia reduced its benchmark interest rate for the 4th time over the last 3 months.  The GDP has contracted by 10.2 percent through May-2009 and there are no signs the contraction is ending.  The interest rate was cut to 11 percent from the current 11.5 percent.

Russia is the world’s largest exporter of energy and has one of the highest interest rates among emerging markets.  The country recorded a 17.1 percent decline in industrial production in May.  The interest rate reduction is intended to attract investors and increase lending to spur economic recovery.  It is expected there will be further interest rate reductions before the end of the year.

The ruble fell to 32.7649 rubles per US dollar and to 38.5226 rubles against the currency basket it uses to measure support.  This is within the band of the US dollar/euro currency basket set at between 26 to 41 rubles. Falling oil prices have had the biggest impact on the economy.  The ruble also weakened against the euro to 45.5763 rubles per euro.

The Norwegian krone is expected to strengthen against the UK pound as the Scandinavian country’s economy shows signs of economic recovery.  The UK economy is expected to recover at a much slower pace than Norway’s economy.  The krone is currently at 10.5482 krone per pound.

The Polish government has been in the news as two government representatives have made public their disagreement over the role of the central bank in government financing.  There has been a government proposal made to force the bank to hand over profits to the government’s treasury rather than allowing the bank to continue retaining them to cover potential currency risks.

A polish presidential representative, Piotr Kownacki, said the proposal would establish policies in violation of the constitution.  The chief advisor to the Prime Minister, Slawomir Nowak, has indicated that PM Donald Tusk supports the law change.  There is concern that the transfer of bank profits to the government’s budget could create instability in the zloty due to lack of currency reserves.

The goal of Prime Minister Tusk is to close the 2010 budget deficit using the bank’s profits.  But many analysts see such action as an undermining of the Poland’s financial stability and credibility. Jakub Borowski is the chief economist at Invest Bank in Warsaw.  He was quoted as saying, “It would be a bad idea to change the law to keep the bank from boosting the reserves for currency risk just for the sake of helping the state budget, especially when the zloty is likely to strengthen and these reserves will be needed.”

 

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