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. Last Updated: 07/27/2016

Ruble Up as Central Bank Targets Prices

The Central Bank allowed the ruble to strengthen 0.5 percent Thursday in what analysts called a pre-emptive strike against inflation likely to be stoked by pre-election government spending.

The ruble strengthened to 29.54 to the dual-currency basket targeted by the Central Bank, made up of 60 cents and 40 euro cents, from 29.68 on Wednesday. The ruble had held steady against the basket since last September.

"The Central Bank is sending a signal to the market that the ruble's appreciation will continue," said Julia Tseplyayeva, chief economist at ING in Moscow.

The Central Bank declined to comment on the ruble's up-move and on the composition of the currency basket, amid market speculation that it might adjust the composition of its dual-currency basket.

The bank runs a managed float, using the currency basket as a guide for its open market operations.

"On a purchasing-power-party basis, the ruble remains clearly undervalued. The Central Bank has elections at the back of its mind and a pre-emptive strengthening of the ruble may not be a bad idea," said Peter Westin, analyst at MDM Bank.

The bank allowed the ruble to appreciate by 4.3 percent against the basket in several small moves in 2006 to rein in inflation by making imports cheaper.

Most analysts expect the ruble to appreciate further by about 3 percent against the basket in 2007.

Central Bank First Deputy Chairman Alexei Ulyukayev said Russia's shrinking current account surplus, due to lower oil prices, might mean the Central Bank has to intervene less on the currency market. The country's gold and foreign exchange reserves, the world's third largest at $304.6 billion, have grown by only $1.6 billion this year, reflecting changes in the value of the dollar and the gold price more than underlying reserves accumulation, analysts say.

This week's monthly inflation figure for January came in below expectations at 1.7 percent, briefly cooling expectations for further ruble appreciation. Russian inflation is closely watched by investors seeking clues on the next ruble move.

"The pressure is lower but the pressure is still there," said Westin, pointing out that the oil prices remain relatively high while Russia also enjoys large capital inflows due to increased foreign investment.

Some traders say investors are building ruble positions to participate in a major rights issue by Sberbank, the country's largest bank, expected to raise the equivalent of $8 billion to $12 billion.

The Central Bank said late Thursday that it was cutting the weighting of the dollar in its dual-currency basket.

The new basket is composed of 55 U.S. cents and 45 euro cents instead of the previous 60 U.S. cents and 40 euro cents. The change is effective immediately, the bank said.