Hryvnia Falls to 5-Year Low as Ukraine Defense of Currency Slips

The hryvnia dropped to the lowest in five years as the Ukrainian central bank’s defense of its dollar peg weakened in the absence of external aid to shore up the country’s dwindling currency reserves.

The hryvnia lost 2.5 percent to 9 per dollar, the lowest intraday level since February 2009, by 4:27 p.m. in Kiev, the capital. That extended the slide this year to 8.4 percent, the most worldwide after Argentina’s peso. Ukraine’s currency will probably fall to 10 per dollar by year-end because of the change in central bank policy, according to Bank of America Corp.

Russia, which bought $3 billion of Ukrainian bonds in December to help avert a default, has delayed the next tranche of aid to ensure its neighbor doesn’t reverse President Viktor Yanukovych’s rebuff to a European Union cooperation deal. With reserves too stretched to finance a record current account deficit in an economy recovering from recession, policy makers have chosen to ease the exchange rate, Bank of America said.

“Hryvnia weakness is a result of an affirmative change of the national bank’s currency peg,” Vladimir Osakovskiy and Vadim Khramov, analysts at Bank of America in Moscow and London, respectively, wrote in an e-mailed report today. “Devaluation is likely to continue until the political crisis ends and any type of financing is provided.”

Ukraine’s international reserves probably contracted to $18.7 billion in January from $20.4 billion a month earlier, according to the median estimate of eight analysts surveyed by Bloomberg before the central bank publishes the data by Feb. 10. That would be below the seven-year low reached before Russia pledged $15 billion in emergency loans in December.

Brief Rebound

The hryvnia briefly rebounded to as strong as 8.655 per dollar in intraday trade today, showing the central bank was probably in the market to manage the currency’s slide, Osakovskiy said in response to e-mailed questions. The Hryvnia’s dynamics over the past several days show a trend wherein the currency “weakens first and then NBU intervenes,” he said.

The central bank offered dollars for a second day, Interfax-Ukraine reported today, without citing anyone. The regulator sold at 8.7 per dollar versus 8.6 yesterday, the news service said.

Talks over constitutional changes in Ukraine failed to ease the political deadlock as the opposition said President Yanukovych was stalling. The president’s turn away from EU integration sparked the biggest anti-government rallies since Ukraine gained independence in 1991, which have killed seven protesters and helped turn the country’s bonds into the worst performers in Europe this year.

While Ukraine’s political crisis is putting pressure on the hryvnia, there is no economic reason for the weakening, acting Prime Minister Serhiy Arbuzov said today in Kiev.

Default Swaps

The cost of insuring the country’s debt with credit-default swaps rose 35 basis points to 1,025 today, according to CMA data. Ukraine’s dollar bonds slumped, lifting the yield on notes due this June by 135 basis points, or 1.35 percentage point, to 14.33 percent. The rate fell 171 basis points in the previous two days as prospects of western aid emerged.

The EU and the U.S. are discussing potential aid if Ukraine forms a new government, U.S. State Department spokeswoman Jen Psaki said Feb. 3 in Washington. Catherine Ashton, the European Union’s foreign policy chief, traveled to Kiev to meet with both sides, as well as non-government organizations.

The central bank conducting devaluation with no external support package “increases risks of disorderly adjustment,” Serhiy Yahnych and Yevgeniy Orudzhev, analysts at BNP Paribas SA in Kiev, wrote in an e-mailed report today.

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