It won't be less than 40 anymore. What is happening to the dollar?

The Ekonomichna Pravda finds out whatinfluences the depreciation of the hryvnia and what the dollar exchange rate may be by the end of the summer .

The end of May was marked by significant events in the foreign exchange market. To meet the demand for foreign currency in the last week of the month, the National Bank sold $1.09 billion. The last time the regulator sold a similar amount from international reserves was in early October 2023, immediately after it canceled the fixed dollar exchange rate regime.

Despite record levels of foreign exchange interventions, the dollar seems to have already consolidated at over UAH 40. Since the beginning of 2024, the US currency has appreciated by UAH 2.3, or 6%.

Analysts attribute the rise in the exchange rate to increased demand for foreign currency. The exchangerate wasinfluenced by the situation in the energy system and psychological factors.

In the first days of June, the market situation was stabilized, but further hryvnia devaluation seems almost inevitable. The only question is its pace.

Trade deficit versus international aid

Since October 2, 2023, the official dollar exchange rate in Ukraine has not been fixed. Since then, the National Bank has allowed market factors to influence it. This means that when the demand for foreign currency increases, its value in hryvnia also increases.

Since the abolition of the fixed exchange rate regime, the official dollar has appreciated by 10%, rising from UAH 36.56 to UAH 40.3. This trend is inevitable, as the economy consumes many times more imports than it earns from exports of goods and services.

In January-April, Ukraine imported goods and services worth $29.8 billion, while exports amounted to only $18 billion. The negative trade balance for the first four months of the year reached $11.76 billion. In 2023, this figure was $9.75 billion.

In these circumstances, Ukraine manages to maintain exchange rate stability primarily thanks to international assistance. In January-May, the country received $11.8 billion in loans and grants from partners. The government uses these funds to finance all non-military expenditures.

Funding from partners replenishes gold and foreign exchange reserves. By selling this currency, the NBU restrains devaluation and minimizes sharp exchange rate fluctuations in the market.

Since the beginning of 2024, the NBU has sold over USD 11 billion from its reserves. At the same time, thanks to foreign currency inflows from partners, the volume of these reserves remains at a fairly high level of USD 42.4 billion (as of early May).

Why the exchange rate jumped

In late May and early June, the situation on the foreign exchange market deteriorated. According to the NBU, the net demand (excess of demand over supply) for foreign currency in non-cash transactions of bank customers increased by 41%.

"In the last week of May, the demand for foreign currency was 45% higher than in the first week. Such a high demand has not been observed since the beginning of 2023," says Sergii Kolodii, Chief Macroeconomic Analysis Expert at Raiffeisen Bank.

There are several factors that create additional demand for the currency. For example,in May, the National Bank introduced one of the largest packages of currency easing. In particular, the regulator allowed businesses to repay interest on their external loans, lifted restrictions on imports of services (leasing, rent), and allowed the withdrawal of dividends from new investments.

Such easing could have created additional demand for foreign currency in the market. The NBU estimated that currency liberalization measures in 2024 would "cost" international reserves about $5.5 billion.

"Currency liberalization is likely to affect the demand for foreign currency, but it is difficult to assess its impact. Most likely, the pressure of this factor on the market is still ahead," said Alexander Paraschiy, head of the analytical department at Concorde Capital.

The NBU has also observed an increase in demand for foreign currency among businesses that have decided to take advantage of the easing. At the same time, they add that this factor "was not decisive for the foreign exchange market conditions."

Another reason for the increased demand for foreign currency isseasonal. The harvest of 2023, which was sold by farmers, is running out. Consequently, the volume of agricultural exports is declining, which reduces the inflow of foreign currency into the economy.

Moreover, even with the receipt of such foreign exchange earnings, problems could arise amid a new wave of hryvnia devaluation, Parashchiy believes. "Most likely, exporters delayed the return of foreign exchange earnings to the country in anticipation of a better exchange rate," he adds.

Russia'senergy terror could also have affected the situation on the foreign exchange market. In particular, due to the destruction of 9.2 GW of generating capacity, Ukraine needs to increase electricity imports. According to the NBU, in January-April, Ukraine spent $75 million on electricity imports from the EU ($155 million for the whole of 2023).

"Such volumes did not have a significant impact on the situation in the foreign exchange market - the balance of foreign operations from electricity trade amounted to less than 1% of net demand in the foreign exchange market in April and less than 2% in May, according to preliminary estimates," the NBU said.

The situation on the foreign exchange market could have been more significantly affected by an increase in imports of energy products (power banks, generators, portable flashlights). Between mid-March and the end of April, demand for these items increased ninefold.

Another important factor ispsychological. The behavior of market participants is influenced by news from the frontline and the energy sector. In addition, the devaluation of the hryvnia itself could have increased demand for the currency.

"Additional factors that increased demand were the purchase of foreign currency by state-owned companies and the standard market reaction to currency devaluation, which is to simultaneously expand demand and narrow supply," Kolodiy said.

What will happen to the exchange rate by the end of summer

The situation in the foreign exchange market will continue to be under pressure from a number of market and non-market circumstances.

"Further steps to liberalize the market by the regulator, the situation in the energy market of Ukraine, the seasonality of the hryvnia and news from the front will be the main factors that will affect the foreign exchange market this summer," said Yevhen Miyuts, a leading expert in the Global Markets Department of OTP Bank.

The actions of the National Bank will play a crucial role. "The exchange rate will follow the NBU's activity and the volume of currency sales on the interbank market. The NBU is likely to continue its current strategy of market operations," said Yuriy Krokhmal, head of treasury products at Avangard Bank.

At the moment, further hryvnia devaluation seems almost inevitable. At the same time, it will be gradual, as the National Bank will seek to maintain the attractiveness of hryvnia-denominated instruments, such as deposits and government bonds.

Analysts interviewed by the EP expect the exchange rate to reach UAH 40-41 per dollar in the summer. "According to our estimates, the National Bank sees the average annual dollar exchange rate in the range of UAH 40.2-40.5 (previous forecast - UAH 39). Therefore, it will calmly let its forecast come true with a probable devaluation of the hryvnia to 42 per dollar by the end of 2024," Parashchiy adds.

Yaroslav Vinokurov