Euro is reliable

Analysis Materials 17 May 2013 14:58 (UTC +04:00)

Azerbaijan, Baku, May 17 / Trend /

Ellada Khankishiyeva, Trend Analytical Centre Head

Despite the negative dynamics of the GDP in the euro area in the first quarter of 2013, as well as encouraging situation in the U.S. stock markets, for the first time in the past several years, analysts gained some confidence in the stabilisation of the exchange rate of the single European currency. However, confidence in the Eurozone economy fell more than expected, but these positive expectations point to economic growth in the euro zone in the near future. The European Central Bank also predicted a slow growth of the euro zone economy in the second half of 2013.

Optimistic forecasts are also stipulated by a chain of positive news from the Eurozone itself. First, the most important development was the two-degree growth rating for Greece assigned by Fitch Ratings agency due to the elimination of the current transactions account deficit. Secondly, another weak link of the Eurozone, Spain, successfully sold government bonds with a life of six to 12 months at an auction held a couple of days ago which gained investors interest.

Partial resolution of the financial problems of these two countries whose negative news or a long time has been pulling down the single currency of the European Union is quite important. The financial assistance allocated to Cyprus in order to stabilise the banking sector removed some tension on this front too. Against this backdrop, the euro is not such a problematic currency anymore and the demand for it increases.

According to a study held by the Pew Research Centre, although the indicator reflecting the popularity degree of the EU fell down by 15 percentage points during the last year from 60 to 45 per cent, the euro remains a popular currency enjoying confidence of more than 60 per cent of Europeans.

The degree of support for the euro also grows in countries such as Italy and Spain. Moreover, the euro has gained the confidence not only of Europeans. As a young global currency it entered into competition with the US dollar conquering back some of its position and succeeded in resisting the harsh conditions of the global financial crisis. After all this, the struggle with the consequences of the crisis for the euro should not be too difficult, although it sounds easier than it is in fact.

Almost all currencies lost ground compared to the U.S. dollar since last Thursday. During this period, the U.S. stock market managed to repeatedly renew its historical maximums. While expecting the U.S. Federal Reserve representatives' statements regarding reductions in the economy stimulation volume at the end of this or early next week, market participants were forced to buy into the American market, while fearing they'd lose a profit. The growth of the U.S main stock indexes strengthened their currency.

The April data on inflation in the Eurozone has pointed out that inflation has fallen to the lowest indices for the last three years and is significantly below the target level of the European Central Bank. This may lead the European Central Bank to take action to revive the economy. This will boost growth of the euro rate in the global stock markets.

This means the processes of economic events from two parts of the world will strain the investors, participants of currency exchanges and analysts causing the latter to make predictions only for the medium term prospect and forcing world countries to keep their strategic reserves in the two reserve currencies, by changing only the proportions depending on a prevailing role of currencies in the markets.

The currency structure of Azerbaijan's reserves is determined based on the currency structure of foreign trade, external debt and the currency of the monetary policy in the country. The U.S. dollar plays a key role in all components.

The outcome means that Azerbaijani total strategic currency reserves as of April 1, 2013 amounted to $46.6 billion, of which $12.3 billion falls to the currency reserves of the Central Bank and $34.3 billion to the State Oil Fund's funds. If the assets of the Azerbaijani Central Bank in foreign currencies are concentrated in the U.S. dollar and the euro to 60 and 35 per cent respectively, the State Oil Fund's portfolio makes up 51.32 per cent in dollars and 38.81 per cent in euros.

The balance of Azerbaijani foreign exchange reserves has allowed the country to avoid losses even in the crisis period.