Russia Moving Further Away From the Dollar

The dollar’s status as the basic reserve currency for the Russian Central Bank continues to deteriorate. According to several reports, Moscow is preparing to invest some of its foreign exchange reserves –$400 billion-plus ; the world’s third largest — in Canadian dollars.

“Technical preparations are underway for operations with Canadian dollars. Then there could be a couple of other currencies and this will be it,” Russian central bank official Sergei Shvetsov, told lawmakers in Moscow today.

While the change of the structure of the currency portfolio of the Bank of Russia has not affected, at least not yet, the official peg of the dual currency basket, which includes $0.55 and 0.45 euro ; such a public affirmation aimed at reducing risks posed by the dollar’s dominance, can not but further weaken greenback’s bearish outlook.

In addition, Russia’s decision reflects the theme of less reliance on the U.S. currency, which has earned a reputation as an unstable and unreliable lately, and the desire to shield the country’s reserves against the dollar’s decline after the greenback lost more than 13% against the euro in the past 12 months.

Russian officials have said they plan to diversify their reserves further and include other currencies, but they have also recognized they face liquidity constraints. Russia already has the mechanism to invest reserves in Swiss francs CHF, but the capacity of that market is limited.

Russia Central bank’s first deputy chairman Alexei Ulyukayev said in September that Canadian and Australian dollars could be added to Russia’s reserves in the future.

Clearly, the trade sentiment against the dollar is getting very crowded these days. And for obvious and valid reasons. Its fundamentals are just terrible and the currency is only being supported because of the lack of a clear alternative. Having said that however, the dollar will not be allowed to collapse. Instead its decline will be carefully managed.

Canada’s dollar appreciated to the highest in a week after the Russian announcement. The currency gained over 1% to the loonie $1.0453/per $, the highest since Nov. 18, and was up 1% at 8:05 a.m. in Toronto, from C$1.0580 yesterday, according to Bloomberg data.

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