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Dinar Drops to Lowest in Decade Before Presidential Runoff

Serbia’s dinar fell to its lowest level in a decade as investors remain wary before the presidential runoff on May 20, prompting the central bank to sell more euros to prop up the currency.

The dinar shed 0.7 percent against the euro today, falling to as low as 113.70 and ending the 113.4361. The Belgrade-based Narodna Banka Srbije sold 50 million euros ($63.5 million) to “ensure the smooth functioning” of the market, it said in a statement on its website, bringing the total spent to support the dinar to 838.5 million euros in 2012.

Serbians go to polls to choose between a path to Europe with Democratic Party leader and incumbent Boris Tadic or Tomislav Nikolic, the leader of the Progressive Party, which prefers political and economic ties with Russia.

“The dinar is definitely psychologically driven and lean volumes in the market are insufficient to change the trend,” said Sonja Miladinovski, a board member of the Serbian unit of Societe Generale SA, in a phone interview. “The market is waiting for the outcome of the election and hopes the International Monetary Fund will return soon to confirm the loan program.”

The Washington-based lender suspended a $1.3 billion precautionary loan program for Serbia in February after it became clear the country will slip on agreed fiscal targets.

The central bank has urged politicians to quickly form a new cabinet and commit to a tighter budget to win back the IMF support and reassure investors that policies remain on track.

Propping Up the Dinar

The dinar is 12.12 percent weaker than a year ago and the fourth worst-performing currency of 174 tracked by Bloomberg. The National Bank of Serbia, which left its benchmark interest rate unchanged at 9.5 percent on May 10, has been supporting the dinar as investors leave Serbia on Europe’s debt crisis and European demand for Serbian exports wanes.

The central bank sent a “wrong message to investors” yesterday when it said it was intervening because both the fiscal slippage and the dinar pressure are temporary, said Ljiljana Grubic, the chief analyst at Belgrade-based Raiffeisen Banka AD.

“They will have to act with an interest rate increase” to change the trend, she said.

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