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. Last Updated: 07/27/2016

Central Bank Ups Weight of Euro in Currency Basket

The Central Bank said on Monday it had raised the share of euros in the euro-dollar currency basket it uses to guide its day-to-day market operations.

The share of euros in the basket was raised to 0.35 from 0.30 euros and the share of dollars was cut to $0.65 from $0.7, continuing a policy of step-by-step adjustments.

"The gradual raising of the share of the euro in the dual currency basket is aimed at further smoothing out intraday volatility in the exchange rate of the ruble against the U.S. dollar and other currencies significant for Russia," the Central Bank said in a statement.

The statement's wording echoed that used when the Bank last raised the euro's share in the currency basket in May.

The basket was introduced early this year to wean Russians off their longstanding fixation with the dollar, and analysts expect it eventually to be evenly weighted between the euro and the dollar.

"The decision to reduce the dollar share in the basket has been the intention of the Central Bank of Russia for quite a while and the process should be expected to continue," said Lars Christensen, Eastern Europe economist at Danske Bank.

"It is a reflection of the fact the Central Bank gradually will try to move towards a more 'flexible' exchange rate policy and let the ruble float more freely."

The Central Bank stresses that it uses the currency basket only as a short-term guide to market operations and says it has been able to reduce the number of market interventions as a result because it has not had to defend a specific ruble-dollar rate.

The authorities use a different, trade-weighted basket whose composition is secret to target the ruble's underlying exchange rate. This is one pillar of a monetary policy that relies mainly on inflation targeting.

This year's goal for the appreciation of the ruble's real effective exchange rate is 10 percent. The authorities expect inflation of up to 11 percent.

Despite boosting the euro's share in the operational currency basket, dealers say the Central Bank still intervenes only on the dollar market.

Dollar-buying intervention to keep the ruble competitive has helped boost the central bank's gold and foreign exchange reserves to $142 billion from $124.5 billion at the end of 2004, despite a hefty debt repayment schedule.

Those reserves are primarily denominated in dollars, and the Central Bank has said in the past that it would like to gradually diversify away from the U.S. currency.