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. Last Updated: 07/27/2016

Ruble Soars to an 8-Year High

VedomostiDemonstrators protesting the use of the dollar in central Moscow in October.
The ruble soared 0.6 percent to an eight-year high against the dollar Wednesday amid heavy dollar selling.

The currency strengthened to 25.2 against the dollar by Wednesday evening, a level at which it last traded in October 1999. The dollar started trading 15 kopeks higher than the Central Bank official exchange rate by 10.30 a.m., as news of a cut in U.S. interest rates began to make its impact felt on the market.

The U.S. Federal Reserve on Tuesday reduced interest rates to 4.75 percent from 5.25 percent -- the biggest reduction in four years. The cut, widely expected among Russian analysts to be 0.25 percent, was made against the backdrop of the U.S. subprime crisis and is geared at reducing the cost of lending and helping to revitalize the U.S. economy by encouraging spending.

News of the interest rate reduction brought the dollar rate down in markets in Europe and Asia, and led to local currencies appreciating against the U.S. currency in many countries.

Traders in Russia said the market's reaction was in keeping with expectations, adding that the trend would likely continue in the weeks ahead.

There will be "huge demand for rubles because the [Federal Reserve's] cut coincides with the time when companies must file tax returns in Russia," said Alexander Karpov, a currency dealer at Zenit Bank.

Currently, the trend on the market is to offload dollars, which may stretch right to the end of September, Karpov said.

Alexei Guryayev, a senior economist with the Center for Economic and Financial Research in Moscow, said that although the declared aim of the Federal Reserve was to prevent a housing market downturn, it actually made the dollar less attractive to industry.

But with the dollar tumbling, Russia will be in a good position to pursue its objective of tightening the economy and reducing inflation, Guryayev said. Ruble appreciation is not threatening to slow or halt the growth of industrial output, he said.

Olga Naidenova, a banking analyst with Alfa Bank, said the Federal Reserve's cut had pushed up demand for ruble-designated assets and created high demand for rubles. She added that the Central Bank was unlikely to allow a dollar freefall after President Vladimir Putin last week told members of the Valdai Discussion Club, a group of Russian and foreign academics and journalists, that the tight inflation target for 2007 could be loosened.

But concern about a strong ruble stifling extended growth is misplaced, said Andrei Kuznetsov, an economist with Troika Dialog.

The main consequences of ruble appreciation are lower profits for natural resource exporters, but this would not affect industrial output, Kuznetsov said.

"Nothing unexpected has happened," Kuznetsov said. "[Today's events] fall neatly within the ruble volatility scale of the past three months."