Friday, May 26, 2006

The currency

I'm not a finance guy so I don't pretend to know everything about currency and currency markets but if a country has to defend it's peg to the dollar and uses $1.7 billion to do it, it is hard for me to understand how that same currency can be considered undervalued. But that is what the Ukrainian National Bank did in the first quarter, use $1.7 billion to defend the hyrvna.

But experts are still saying that the hyrvna is undervalued and that a correction is in the offing in the fall. I assume they mean a correction which strengthens the hryvna against the dollar. Which again raises the same question: if the hryvna is strong why then did the central bank have to intervene to defend it?

Any thinking on this would be welcome.

1 comment:

Anonymous said...

it sounds like political instability factors are keeping the Hryvna undervalued, but that with continued unallayed fears of instability that they've needed to defend the value of their currency.

I guess the good news is that they spent all that money on defending the currency rather than printing money for the election.