Ukraine's Hryvnia May Gain as Fed Keeps Rates Low, Investment Capital Says

Ukraine’s currency may strengthen to 7.30 per dollar by the end of 2011 as the U.S. Federal Reserve keeps interest rates low and capital floods into emerging markets, Investment Capital Ukraine said.

The hryvnia will probably appreciate to 7.80 per dollar by the end of this year, the Kiev-based investment bank’s analysts, led by Alexander Valchyshen, said late yesterday in an e-mailed note to clients.

“As the economic recovery and accompanying recovery of consumer demand are expected to be combined with, and possibly fueled by, the extraordinarily loose monetary policy of the Fed, we foresee rising inflation,” the analysts said in the report. “The central bank will allow nominal currency appreciation if the anticipated flood of foreign capital investment occurs.”

The hryvnia fell 45 percent against the dollar in the 12 months through August 2009, making it the worst performer among more than 170 currencies tracked by Bloomberg. The currency has dropped 0.7 percent against the dollar since Sept. 1, after strengthening for the previous eight months.

The currency’s depreciation is “temporary” and was caused by “expectations,” the central bank’s chief adviser, Valeriy Lytvytskyi, told journalists yesterday. The central bank, which controls the exchange rate by buying and selling dollars, will “mitigate sharp fluctuations,” he said.

The central bank reported Oct. 6 that it sold $686.9 million on the interbank market last month to arrest the hryvnia’s decline.

The bank cut its benchmark discount rate to 7.75 from 8.5 percent on Aug. 10, its third reduction this year, as inflation slowed.

Inflation jumped to 10.5 percent in September, the highest since March, fueled by the cost of food, according to the government. Food prices climbed 13.2 percent in September from the same month a year earlier, after rising 8.8 percent in August, the state statistics committee said Oct. 6.

To contact the reporter on this story: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net;

To contact the editor responsible for this story: Willy Morris at wmorris@bloomberg.net;

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