Why Dollar is gobbling up Euro, but not Ruble?

Let us look at two charts, Euro-Dollar?and Dollar-Ruble. These are one year charts from XE.Com. I like this website because they use the mid-market rate, which gives you a feeling of the market average, rather than the rate from the end of the day transactions.

As you see from the above one year ago, 1?Euro could buy 1.21251 US Dollars and now 1 Euro can buy only 1.04326 US Dollars. The fall is about 14% year on year. Now let us look at the second chart.

One year ago you needed 72.0308 Russian Rubles?to buy 1 US Dollar and now one needs only 57.4547 Russian Rubles. The appreciation is about 20% .These two charts show a few interesting facts, whether experts will directly admit or not.

1.???The Ukraine-Russia conflict is taking its toll on the Euro most.

2.???US Dollar as always is a safe haven currency in any global economic turmoil.

3.???EU will have to buy, if they wants to shun Russia, LNG at a higher USD price, besides they have to also pay for the weakness of their currency, in terms of higher dollars.

4.???The strength of the Russian currency also proves in a way that the sanctions are not working on Russian Federation, at least for now.

5.???Currency-wise both USA and Russia are gaining, and only Euro is waning

EU is an economic union of many sovereign states, while USA and Russian Federation are two separate and powerful sovereign states. To that extent Euro needs many more policy fine tuning and discussion for consensus, than in case of the other two currencies.

One rider

There is one rider however. Market for Euro and Dollar are very sophisticated and they are freely floating currencies. Ruble has lost that character with capital controls introduced because of Ukraine-Russia conflicts and Western sanctions. Russia is slowly withdrawing the capital controls, and reducing the interest rate also. But one cannot say Ruble will remain so strong against US Dollar in a few months, and that may not be desirable for Russia also. One more reason for the strength of the Russian currency is, even if control on outflow is reduced, Russia can hardly buy anything from EU or USA, because most of the important goods and services are already sanctioned.

Outlook for Euro

One thing however is very sure, Euro is shortly going to be at par with US Dollar. The basic reason for this is unlike USA, EU is not self sufficient in energy. USA can take care of its requirement and still export oil in large quantity if its fracking oil production rises. US is exporting Liquified Natural Gas to EU in any case, and will probably export more, influencing the balance of trade of EU with USA negatively.

Change in Interest Rate

The second reason is, to off-set inflation risks, US Federal Reserve has already started increasing the interest rate, and has even indicated that interest rate will be increased further until inflation is brought down to 2%. But EU has not yet reacted with increase in interest rate, which is nothing but a policy paralysis.

If energy supply from USA and other places cannot fully compensate the energy curbs being effected by EU on Russia, the production level will also go down and stagflation will set in in EU area. This for sure, is going to affect the exchange rate of Euro and ultimately Euro will be at par with US dollar, if not less.?

Incidentally EURO is falling against Indian Rupee also. One year ago one needed 88.9248 Indian Rupee to buy 1 Euro and now you can buy 1 EURO by spending 81.4802 Indian Rupees.

The Ukraine refugees are mostly looking for their stay and support in the EU areas only, which is burdening EU with a substantial amount of spending.

By and large USA and Russia are gaining from this conflict and EU is losing. The profits being garnered by US energy companies are mind boggling. Even exporting lesser quantity of energy and offering discount Russia have not suffered in export income so far because the prices have gone up substantially. On top of that by arm twisting the importers to pay in Rubles, it has been able to offer stability to Ruble. And all these are in spite of the fact that half of Russia's foreign currency reserves have been immobilized by the West.

Many lessons on foreign currency management has to be learnt in the current scenario.