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Dollar falls below 40 crowns

THE US dollar fell to below 40 Slovak crowns at the turn of the new year as a weak US economy, fears of a war with Iraq, and news of North Korea's nuclear programme pushed the American currency to an almost four-year low against the firming crown.
Domestic money market dealers said they expected the dollar to fall lower against the crown this year, a sign of both the dollar's weakness and the crown's growing strength.
"The American currency hasn't been helped by several years of economic problems," said Vladimír Gajdoš, a dealer at commercial bank Slovenská Sporiteľňa.

THE US dollar fell to below 40 Slovak crowns at the turn of the new year as a weak US economy, fears of a war with Iraq, and news of North Korea's nuclear programme pushed the American currency to an almost four-year low against the firming crown.

Domestic money market dealers said they expected the dollar to fall lower against the crown this year, a sign of both the dollar's weakness and the crown's growing strength.

"The American currency hasn't been helped by several years of economic problems," said Vladimír Gajdoš, a dealer at commercial bank Slovenská Sporiteľňa.

On the other hand, the election in Slovakia last September of a pro-reform government, followed by Slovakia's invitations at the end of 2002 to join NATO and the EU, have pushed the crown higher against all major currencies, including its reference currency, the euro.

"The elections played a significant role [in the strength of the crown]," said Slovenská Sporiteľňa analyst Juraj Kotian. "The four parties that formed the government offered a strong guarantee that Slovakia would be invited to join NATO and the EU and continue with reforms, which so far has been borne out by reality."

The crown's recent strength contrasts with the rate of more than 52 against the dollar seen in 2001, when political instability and worrying macroeconomic developments pushed the crown 25 per cent under the current dollar exchange rate.

Another factor pushing the crown higher at the turn of the new year, especially against the euro, where it recorded 41.24 per euro on January 6, has been the interest rate differential between eurozone and Slovak currency deposits.

With the European Central Bank offering interest rates below 3 per cent, compared to the 6.5 per cent two-week repo rate offered by the National Bank of Slovakia (NBS), Kotian said, portfolio investors had been motivated to buy crowns, which on a fairly illiquid market pushed the crown higher in the first week of January.

"We also have to remember that Slovakia as an EU candidate has good economic growth prospects, at least better than the eurozone," Kotian said. "With EU entry scheduled for 2004, the promise of EU fund transfers, the growth of new institutions, a likely rise in foreign investment - these all underpin forecasts of relatively strong economic growth."

Even macroeconomic results are helping the crown these days: November trade results, showing a Sk9.7 billion deficit, were some Sk3 billion better than analysts had expected, largely because of the weak US dollar, and pushed the crown up immediately by 10 basis points against the euro.

"We expect these positive developments to continue in December," said Tatra Banka analyst Robert Prega, adding that he predicted the 2002 full-year trade deficit at Sk95 billion, or 8.9 per cent of GDP, compared to Sk102.7 billion the year before.

The trade deficit is expected to fall to Sk70 billion this year, as consumer demand for imports cools off following tough price rises at the beginning of January.

Kotian said he expected the crown to break 41 against the euro "within two months", and to end the year "somewhere over 40 against the euro"; the dollar he pegged at 38.6 crowns by the end of the year.

Despite the fact that the positive trade results have removed some of the central bank's logic for fighting the strength of the crown, Kotian said he expected the NBS to intervene actively by buying domestic currency as the crown reached 41 against the euro.

Karol Mrva, director of the NBS forex department, would not comment on the bank's plans, but said he saw no grounds for a stronger crown: "The trade balance for the year [2002] still looks ominous, and we see no reason for a more radical strengthening of the crown. We are following the situation, and we remain ready to intervene."

Shortly before the end of the year, the NBS intervened against the strength of the crown when it broke 41.2 to the euro; on January 10 it was trading at 41.52 to the euro and 39.52 to the dollar.

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