Record-breaking dollar: analyzing hryvnia's weakening and whether to rush to exchange offices
At the end of May, the National Bank of Ukraine raised the official dollar exchange rate above 40 hryvnias for the first time, a historic high. The growth did not stop there; the US currency gradually crept up in the following days.
Why is the hryvnia weakening and will its decline continue? Can Ukrainians continue to invest in deposits or should they buy a more stable currency "before the rate collapses"? hromadske asked economists.
Who sets the official exchange rate and how?
It is set daily by the National Bank of Ukraine (NBU). It is based on the results of trading on the interbank foreign exchange market, and this is influenced, among other things, by current economic indicators and other financial factors.
When setting the exchange rate, the central bank takes into account inflation, or price growth. "These are interrelated processes: the weaker the hryvnia exchange rate, the more expensive it is for importers to purchase goods for Ukraine; and if imports are more expensive, inflation is already rising," economist Oleh Pendzyn explains to hromadske.
At the same time, the regulator should take into account the fact that the Ministry of Finance receives all of its macro-financial assistance from international partners in foreign currency, while social payments are made in hryvnia. Therefore, the more favorable exchange rate the Ministry of Finance gets for selling, say, a dollar, the more hryvnia it will receive.
On the one hand, the Ministry of Finance wants the exchange rate to weaken. On the other hand, the National Bank realizes that if the exchange rate is weakened too much, inflation will rise.Oleр Pendzyn, member of the Economic Discussion Club
Why did the dollar exchange rate reach a record high?
The fall of the hryvnia against the dollar does not mean that the NBU is not in control of the situation: for the state, currency fluctuations are primarily a tool, even if it is not fully under the central bank’s control.
It is worth noting that during the years of the full-scale war, Ukraine’s National Bank managed to accumulate more foreign exchange reserves than ever before in all the years of Ukraine's independence. If earlier this volume fluctuated at the level of $29-30 billion dollars, now it stands at $42 billion.
Last year, we received $41 billion in macro-financial assistance from our partners. This year, we should receive another 37.5 – we have all the evidence for this. That is, the National Bank can now afford to set such a rate.Oleh Pendzyn, member of the Economic Discussion Club
The main reason why the official exchange rate has reached a record high is the significant trade deficit last year. That is, Ukraine sells goods abroad for a significantly lower aggregate amount than it buys from abroad. Currently, this difference is approximately $1.5 billion per month, Illya Neskhodovskyi, an economic expert, told hromadske.
The situation is complicated by the fact that instead of the usual electricity exports until 2022, the state is forced to import large volumes of electricity, which also affects supply and demand in the market as a whole.
The rise of the dollar is also a consequence of the National Bank's currency liberalization. According to Neskhodovskyi, the restrictions on foreign currency transactions should have been eased even earlier—in February 2024 or in the fall of 2023. The expert believes that this would not have had any negative consequences for the economy.
Currently, currency liberalization, given the situation in the energy sector, has a negative impact on exchange rate formation. This is because there is an increased demand from those who make decisions on the payment of dividends for previous years, and this generally has a negative impact.Illya Neskhodovskyi, Head of Analytical Department, ANTS Network
Now it is expected that the new exchange rate will improve the situation for Ukrainian exporters, who will receive more revenue from abroad. As a result, it will also help Ukrainian producers, as the demand for imported goods will decrease, as they will become more expensive due to the devaluation, i.e. the depreciation of the hryvnia against foreign currency, which is used to purchase these goods abroad.
What are the expectations for the exchange rate in the future?
The state budget adopted by the Verkhovna Rada set the hryvnia exchange rate at 40.7 per U.S. dollar on average for the year. However, the NBU will not artificially raise or lower the exchange rate, but will be guided by the prescribed figure. This mark is not a goal per se, but only provides an approximate benchmark for planning. The experience of previous years shows that the average annual exchange rate is usually lower than the one indicated in the budget. It was higher only in 2022.
For another week, the hryvnia may devalue at the pace seen last week. Therefore, players who are currently holding off on selling currency will enter this process, realizing that this rate is already favorable for them. There will be no further devaluation, and the situation will normalize. Around the beginning of July, the exchange rate will drop to around 40 hryvnia to the dollar.Ilya Neskhodovskyi, Head of Analytical Department, ANTS Network
Oleh Pendzyn, on the other hand, assumes that in June the exchange rate will reach the level envisaged in the budget and will continue to grow to at least 41 hryvnia to the dollar.
The experts are not making any forecasts for a longer period. However, they note that closer to winter, the state will need to purchase more energy resources, and this will also affect the exchange rate. The amount of international financial assistance that Ukraine will receive in 2025 will also play a role, while there is currently no clear understanding of this.
Is it worth sounding the alarm?
So is it worth running to the exchange offices now? Illya Neskhodovskyi believes that it is not. According to him, if Ukrainians currently have savings in foreign currency, they should keep them in it. And if they are thinking of buying dollars, they will not make money on the exchange rate.
Experts believe that the current situation with the official exchange rate is not a bad signal for Ukrainians, so they should not panic. Thanks to international aid, even in the event of a negative trade balance, Ukraine has enough foreign currency to maintain a stable exchange rate if necessary.
Pendzyn believes that deposits are still a profitable method of saving today. According to his estimates, a deposit in hryvnia will be even more profitable than a deposit in foreign currency.
Neskhodovskyi emphasizes that even taking into account the trends in the foreign exchange market, it still makes sense to buy domestic government bonds.
The issue of the hryvnia exchange rate, the fall of which allegedly means the collapse of the economy, is a painful topic for Ukrainians, and therefore it is successfully used for Russian information and psychological operations. The enemy benefits from this panic and chaos in the financial system, so Ukrainians must remain calm and keep a cool head.