Monday, 15 June 2009

Does Russia have full confidence in the US dollar?

After a series of announcements by BRIC leaders that they were looking at diversifying their reserve holdings away from the US dollar there was an apparent volte face in the official pronouncement this weekend by the Russians at the G8 summit of finance ministers in Italy. According to this report from Bloomberg:
Russia has full confidence in the dollar and there are no immediate plans to switch to a new reserve currency, Finance Minister Alexei Kudrin said. “It’s too early to speak of an alternative” to the dollar, Kudrin said in Lecce, Italy, in a television interview today after meeting with finance chiefs from the Group of Eight nations. The fundamentals of the dollar are still in “good shape.”

This follows on from a statement made on June 10th by the Russian central bank that it was planning to move out from some of its US Treasury holdings into IMF bonds.

Apart from the obvious fact that Russia, along with other central banks, is a major player in the forex market there are several ways to interpret this change of stance:

1. The Russians along with the Chinese are realizing that talking down the dollar (or at least not talking it up) will be harmful to their existing holdings of Treasuries and other dollar denominated assets.

2. Tim Geithner's recent visit to Beijing and his "frank" discussions with the Chinese could have caused some alarm about the possibilities of not supporting the dollar during coming months (years) when mountains of T-bonds need to find buyers.

3. The June 10th announcement from the Russian central bank could be seen as part of a ploy to push up yields on the US Treasury notes and bonds issued last week and at the same time pushing down the dollar prior to the auctions. With the auctions out of the way and with yields down and the dollar up the Russians and the Chinese may now be feeling better about their participation in last week's auctions.

4. It is somewhat extraordinary to see how the world's largest debtor (still with a AAA rating) and with the greatest refunding needs, has to tweak its own policy announcements on its currency and monetary policy, to placate concerns of the Russian central bank, which just over ten years ago was defaulting on its debt.

No comments:

Post a Comment