When elephants are beaten, the grass is damaged. We have been convinced many times of the accuracy of this old African proverb, so it is time to ask ourselves how the trend of strengthening the dollar against the euro, which has been particularly pronounced in recent months, is reflected in Serbia. In the period from June 1, 2021 to mid-December 2021, the dollar strengthened against the euro by about 8 percent, so at the time of printing this issue, 1 dollar is worth 0.89 euros.
In particular, this topic could be topical in light of the beginning of the withdrawal of stimulative monetary policy measures by the US Federal Reserve, which leads to the expectation that by the middle of next year, this institution will increase interest rates on the dollar. In essence, this should lead to further strengthening of the value of the world’s leading currency.
Should Serbia be more interested in the dynamics of strengthening the dollar or the expectation that from the middle of 2022, the President of the Central Bank of America Jerome Powell will announce an increase in interest rates on the dollar, which could push the head of the European Central Bank Christine Lagarde to leave the negative zone reference interest rates even earlier than expected, which is at least until 2023, which will raise interest rates on the euro.
Recognizing the argument that the strengthening of the dollar alone will not have a direct impact on the Serbian financial system because our economy is more dependent on the euro, interlocutors of the “World Banking and Investment” point out that the economy could see the negative impact of this trend in its balance sheets. The price on the stock exchanges is always quoted through the dollar, and the state through the increase of the dollar part of the public debt.
However, the topic of raising interest rates on the dollar is certainly “hotter” because the portfolio of investments that will return to the United States will generally turn around in the world, due to higher returns, which could lead to some pressure on the exchange rate in Serbia.
Why is the dollar getting stronger?
Year-on-year November inflation in the United States was 6.8 percent, the highest level since 1982. At the same time, labor market data point to continued employment growth and strong wage growth in November in the United States. High inflation and employment growth were the key triggers for the Federal Reserve to make a decision to reduce the net purchase of bonds within the quantitative easing program, which will be completed by mid-2022 at the latest.
On the other hand, in the euro area, there was also a large year-on-year acceleration of inflation, which amounted to 4.9 percent in November, which is the highest level since 1997, with the growth of prices in Germany as much as 6 percent in November. Despite the significant acceleration of inflation in the euro area, most analysts expect that the European Central Bank will continue to buy bonds and keep interest rates deep in negative territory at least until 2023.
In other words, Powell believes that inflationary pressures are not temporary, so he recently stated that the term transitional is no longer used for that purpose, while Lagarde still believes that the rise in prices will not last.
According to the National Bank of Serbia, the expected earlier process of tightening monetary policy in the United States has led to faster growth in dollar bond yields and increased investor demand for this currency. The current market valuation of the euro / dollar exchange rate reflects the expectations of market participants regarding the divergence of US monetary policy and the euro zone,” the World Bank in Serbia told the “World of Banking and Investment”.
Economist Vladimir Gligorov says that the trend of strengthening the dollar was mostly influenced by the rapid recovery of the American economy. However, the prospects for next year are now more uncertain than they were this year, so that the impact of the economic recovery, according to Gligorov, is being lost for now.
“Again, tighter monetary policy can further slow the recovery, so it is difficult to measure the impact of the financial market, which could push the dollar up, and the slowdown in economic activity, which could have the opposite effect,” explains the economist from the Vienna Institute for International Economic Studies.
Further prediction of course movements is, he adds, ungrateful. “Some additional strengthening of the dollar against the euro would not be a surprise. But there is little reason that there could be significant changes in exchange rates. A lot depends on the recovery of trade, which again depends on the pandemic,” Gligorov replied.
Dollar public debt is declining
The share of the dollar in the total public debt in the last decade had first an upward and then a downward trend. Namely, in the period from 2011 to 2016, the dollar debt increased from 17.7 percent to 33.4 percent of the total public debt. However, since 2016, the share of dollar debt has been reduced to the current 10.4 percent, which was the amount of public debt in dollars at the end of September this year. Having in mind these indicators, the National Bank of Serbia points out that the public debt denominated in dollars is significantly “hedged”, ie protected from foreign exchange risk.
“As for the direct impact of the strengthening dollar on the Serbian financial system, given that the Serbian economy is more tied to the euro than to the dollar, one should not expect a significant direct impact,” the central bank said.
At the same time, the National Bank of Serbia says that citizens should not worry either, because the ban on indexation of loans to citizens in any currency other than the euro has been in force since 2011, and that today such loans are almost non-existent in banks’ balance sheets.
If the trend of strengthening the dollar continues, Gligorov estimates that the greatest impact on the economy could be reflected in imports in dollars, which are primarily energy sources. “Strengthening the dollar, which is not accompanied by falling oil and gas prices, can be expensive,” the economist said.
Namely, for example, trade in crude oil and oil derivatives is always calculated in dollars. This means that the strengthening of the dollar can significantly increase the cost of oil procurement. However, it often happens that when the dollar rises, the price of oil falls, which makes that impact neutral.
The editor-in-chief of the Energija Balkana portal, Jelica Putniković, says that the price of crude oil is around 70 dollars per barrel and that it is expected that it will range from 70 to 80 dollars per barrel. She specifies that the Association of Oil Producers OPEC, in cooperation with Russia and some other countries, formed the OPEC Plus alliance, which manages to balance the price of crude oil with its tactics, first reducing placements and then gradually returning to the market. That they are successful can be seen by the fact that at the beginning of this year, some analysts predicted that at the end of 2021, a barrel will reach a price of as much as 200 dollars, she explains. As for the prices of natural gas, Putniković expects that, among other things, a lot will depend on the geopolitical moves of the USA and the EU towards Russia.
A similar opinion is shared by the president of “Metalac”, Dragoljub Vukadinović, who estimates that next year will be marked, above all, by the continued growth of non-metal and food prices.
“I completely agree with Gligorov’s statement that the strengthening of the dollar could increase the price of energy imports, which would represent an even greater burden for the economy. Especially since stock exchange quotations in dollars are expressed not only for oil and gas, but also for some metals,” explains Vukadinović. However, in the case of “Metalac”, he points out, most of the imported components for production, as well as exports, are tied to the euro. That tells him, it is not a consolation, because he expects further growth of input costs related to the euro. It seems that it has always been and remains that it doesn’t matter whether elephants fight or make love, because the grass certainly suffers, Biznis reports.
