The half year of the dollar and ruble

We are only halfway there, but it is already clear that 2022 will be very different from what it looked like at the end of last year. The advance of the dollar and especially the ruble is attracting a lot of attention on currency markets. The euro may be able to take over in the second half of the year.

To be honest: six months ago, would you have thought that you would spend more than € 2,50 at the pump for a liter of petrol? The sharp rise in energy prices is just one of the consequences of the terrible war in Ukraine. Combined with all the problems in supply chains, among other things, this is one of the reasons why inflation is screeching high. The measures taken by central banks to contain this inflation are reverberating strongly in the currency world. However, that is not the biggest surprise in the first half of 2022.

Surprise number 1
In the days following the invasion of Ukraine, the Russian ruble came under strong pressure. Since then, however, the value has skyrocketed. The currency is now worth half as much as it was at the end of 2021. This is because more and more oil and natural gas from Russia have to be settled in rubles. In addition, Russian companies are obliged to exchange almost all of their foreign currencies for rubles. On the other hand, as a result of the sanctions, the country has hardly any possibilities to spend dollars, euros and other hard currencies.

Surprise number 2
The second surprise is the rate at which interest rates in the United States are rising. In June, the US central bank raised the key interest rate by three-quarters percent for the first time since 1994. The intention is to reduce inflation towards the target level of 2% with these measures. In May, inflation still stood at 8,6%. Economists expect that the 10% will be tapped soon. In Europe, interest rates are still at the same level as six years ago. The last rate hike was even more than ten years ago. The widening interest rate differential with the United States is an important reason why the dollar, like the ruble, appreciated strongly against the euro in the first half of the year.

Surprise for the future?
That same euro could possibly be the surprise of the second half of the year. In a few weeks, the European Central Bank (ECB) will raise interest rates for the first time in more than ten years. But what happens next? Will there be a new increase in September and how big will it be? And is ECB President Christine Lagarde really serious about her promise to curb inflation? Because at an inflation level of more than 8%, this requires more than two or three small interest rate steps. Naturally, the ECB wants to prevent economic growth in Europe from turning into a recession. But for the time being, the stubbornly high inflation seems to be the prelude to interest rate hikes than what the interest and currency markets are now pricing in. A euro advance is therefore one of the possible surprises for the coming six months.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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