Last week, an important event took place in global currency markets.

After two decades of fluctuations, US dollar finally reached parity with euro. Of course, the situation with the dollar that equalled the euro will have an impact on global financial, currency, and economic processes in the medium and long term, will lead to redistribution of flows of goods and capital, and with it, spheres of influence (not only economic but also political).

The most important factors in the "balancing" of the value of the main world currencies include the increase in the base interest rate by the US Federal Reserve, better economic dynamics and lower unemployment in the US compared to the EU. Along with this, financial systems are quite sensitive not only to monetary policy instruments (interest rates, reserve requirements, open market operations, etc.) but also to political troubles and contradictions. Therefore, the demonstrated weakness of the EU in the Ukrainian issue (inability to quickly and efficiently resolve the problem of military aid to a European country fighting for freedom and independence) also could not but affect the financial strength of the European Union.

Although strengthening dollar together with the higher US base rate mean that financial resources are becoming more expensive, we view this process as generally positive and even desirable. Surprisingly, Ukraine will be able to get some benefits from this.

First, the increase in the National Bank of Ukraine base rate (which has already reached 25%) allegedly means difficulties for domestic economic agents getting credit funds. However, additional complications are unlikely, since lending in Ukraine little depends on interest rates. At least, in recent years, the lending structure has not seen fundamental changes, and the volume of lending to the real sector and households (despite formally introduced various incentive programmes) remains low. Say, the volume of loans provided by the banking system from August 2021 fluctuates within a narrow range of UAH 1.01–1.07 trillion, while loans to households amount to UAH 230–255 billion and do not depend on interest rates. In such conditions, part of funds may be used to finance growing state needs.

Secondly, an increase in the US base rate also means an increase in the cost of new (expensive) dollar borrowings on world markets, and therefore an increase in the cost of servicing (interest payments) on new debts, which will reduce non-interest expenses of budgets of the debtor countries. Such strengthening of US dollar will also mean that for external payments (on foreign debts, largely denominated in dollars), countries will have to withdraw larger amounts of their own resources, which will generally complicate the current and future problems of public finances and debts.

It is extremely difficult for Ukraine, waging a war for independence, to count on a "soft" treatment in the world financial markets. That is, market currency resources for Ukraine are practically closed. Today, sources of funding (mainly in US dollars) for our country may include aid, grants and targeted interstate loans from international financial institutions and leading developed countries. Therefore, stability and strength of the currency in which they are provided are particularly important and beneficial.

Source:

https://razumkov.org.ua/statti/chy-strashnyi-dorogyi-dolar-dlia-ukrainy