Why Did the Euro Fall on Russia’s Credit Downgrade?

RussiaOne of the big stories in the currency market this morning is news that ratings agency Fitch downgraded Russia’s debt to BBB, which is the second lowest investment grade. The Euro immediately sold off on the announcement as investors fear that the Russian central bank will step into the market and stop the Ruble from falling. Over the past 6 months, the Ruble has dropped 27 percent against the Euro and 55 percent against the US dollar.

The credit rating downgrade raises the risk profile for Russia causing many investors to bail. (Why was Russia downgraded?)

The reason why the Euro has been impacted by the developments in Russia is because the central bank manages the Ruble’s value against a basket of dollar and euros. When the basket was introduced in 2005, it was made up of 10% Euros and 90% dollars. The Euro’s share has gradually increased since then and the basket is now 45% Euros and 55% dollars.

If the central bank intervenes to stop the Ruble from falling, they would have to sell Euros and US dollars to rebalance their currency basket.

About Kathy Lien 236 Articles

Kathy Lien is an Internationally Published Author and Chief Strategist of DailyFX.com, one of the world’s most popular online websites for currency research. Her trading books include the highly acclaimed, Day Trading the Currency Market: Technical and Fundamental Strategies to Profit form Market Swings (2005, Wiley); High Probability Trading Setups for the Currency Market E-Book (2006, Investopedia); and Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game (2007, Wiley). As Chief Currency Strategist at FXCM, Kathy is responsible for providing research and analysis for DailyFX, the research arm of FXCM. She also co-edits the BK Forex Advisor, an Investopedia.com Premium Service with Boris Schlossberg – one of the few investment advisory letters focusing strictly on the 2 Trillion/day FX market.

Kathy is also one of the authors of Investopedia’s Forex Education section and has written for Tradingmarkets.com, the Asia Times Online, Stocks & Commodities Magazine, MarketWatch, ActiveTrader Magazine, Currency Trader, Futures Magazine and SFO. She is frequently quoted by Bloomberg, Reuters, the Wall street Journal, and the International Herald Tribune and has appeared on CNN, CNBC, CBS and Bloomberg Radio. She has also hosted trader chats on EliteTrader, eSignal and FXStreet, sharing her expertise in both technical and fundamental analysis.

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