WHERE IS THE "AMERICAN" GOING?

Iran has made a strong move in its struggle against the USA - it has stopped selling its oil for US dollars. The Iranian news agency ISNA announced the suspension of dollar operations on Saturday, quoting Minister of Oil Industry Gholamreza Nozari. Last month a top Iranian source said that "almost all" Iranian oil is sold in non-American currency. Iranian President Mahmud Ahmadinezhad previously called the US dollar "a valueless piece of paper". Experts predict that if more oil producing countries take such a step, the US currency will face another crisis. It must be noted that a number of Middle Eastern countries have come up with a similar initiative, while OPEC has seriously considered giving up the dollar. The organization is not happy with the weakening of the US currency, which causes loss of revenues from oil sale.

At the same time, the rate of the dollar slightly increased in December, which is explained by the decision of the US Federal Reserve System to lower the bank rate for January by 0.25 per cent - something that many experts had predicted. Now the bank rate in the United States is 4.25 per cent.

Of course, these events draw everyone's attention to the market: people are curiously watching how the rate of the "American" will change.

The games of the strong

In order to answer these questions, we have to find out the real reasons for the current situation. Many experts tend to believe that the weakening of the dollar is caused by the state of the US economy. "First, there are fears that Americans have become more careful with their expenses - this is proved by the fall in consumer spending. Second, problems on the US real estate market, especially the substandard mortgage sector, remain serious. The combination of these reports prompted many observers to reconsider their views on the prospects of the US economy in the short-term," the senior economist of the London-based research centre Economist Intelligence Unit, Matthew Sherwood, believes. The situation on the consumer market clearly reflects problems on the real estate market - problems in the substandard mortgage segment (real estate loans issued to clients with a risky credit history) continued there. "One of the reasons why it caused the rate of the dollar to fall was that about half of funding for the current account deficit came from corporate securities. The growth in spreads exacerbates the situation of the US dollar," Alan Ruskin, an analyst with RBD Greenwich Capital, believes.

The adviser and editor of the magazines The Banker and Euromoney, Nick Kochan, said in an interview with Trend that the cause of the fall in the rate of the dollar is the inability of the United States to take control of unpredictability inside the country and debt problems. However, there is another thing to point out: "The low rate of the dollar is of benefit to US exporters. They will make a profit on import from Japan, China and countries with stronger national currency. Consumer goods sold in dollars will be more competitive now. The balance in world trade will change."

Other world class experts also tend to believe that the fall in the rate of the dollar is of benefit to the Americans themselves. In their opinion, everything started after major US car manufacturers, General Motors, Ford and Chrysler, discovered in October last year that the volume of the sale of their products was much lower than that of Toyota and Honda - because the Japanese yen is cheaper than the dollar, and therefore, cars manufactured in Japan are cheaper. Then they demanded that the White House take decisive measures to rectify the situation. Politicians, as is known, depend on major businesses even in a superpower like the US. Thus, the authorities had no choice but to start reducing the rate of the dollar for the euro - currency which is slowly but surely gaining ground in the world.

What should we expect?

At the same time, if the dollar really continues losing its position as currency for oil and other main consumer goods, this might make it less attractive and weaker. This will accelerate the fall in the rate of the dollar for the euro and other currencies. The president of the European Commission, Jose Manuel Barroso, has described the weak dollar as "a problem of the world economy" (AFP). The analyst of the investment company Antanta Capital, Maksim Osadchiy, thinks that the weakening of the US currency will cause a fall in the share of dollar assets in gold and currency reserves. "The fall in the rate will set in motion the mechanism of the domino effect: a fall in the rate of the dollar - sale of dollar assets - a fall in the rate of the dollar," he said. What is more, he said that the weakening of the dollar will result in the leveling of the US foreign trade balance - a fall in import and a growth in export, which will strengthen the dollar in the long-term.

However, Nick Kochan is sure that the dollar will continue to weaken: "There was a time when one pound cost three dollars. I think this tendency will continue to develop. There is a big problem here - inconsistency between the desire of the financial sector to have lower interest rates, which will promote a decision to restrict credits, and the demands of consumers who insist on high interest rates, which might prevent inflation. Thus, there is internal inconsistency on the US financial market. This causes growing concern."

As for the impact of the situation on the world currency market on Azerbaijan, as is known, the amount of oil dollars coming into the country is steadily growing due to the growth in the volume of Azerbaijani oil export. Of course, this cannot but affect the rate of currencies. The rate of the US dollars for the Azerbaijani manat remains near the historical minimum, fluctuating between 0.85 and 0.84 US dollars for one Azerbaijani manat. At the beginning of this year, the rate of the dollar in Azerbaijan was 0.87 manats and a couple of years ago - 0.98 manats. "The main reason for the fall in the rate of the dollar in Azerbaijan is the influx of large volumes of currency investment revenues gained in the period when the rate of the dollar and world oil prices were at their historical maximum. Azerbaijan's integration into the world economy is continuing, and of course, the country's economy is becoming more and more susceptible to foreign factors, and developments in the world economy affect our country as well," analysts of the TrendCapital agency think.

In their opinion, the rate of the dollar for the manat will stay at 0.08-0.84 by the end of the year, however, this rate is closely linked to the dollar/euro couple. This means that every change in the rate of the dollar for the euro by one cent causes a change in the rate of the dollar for the manat by 0.1-0.15 manats. According to the chairman of the National Bank, the manat might strengthen by 3-3.5 per cent according to the results of this year. According to the forecast of the Azerbaijani government, the average annual official rate of the US dollar in the country will fall by 18.55 per cent in the next four years - the average annual rate of the US dollar will be 0.6912 manats for one dollar in 2011. According to government sources, the average annual official rate of the US dollar in 2007 is expected to be 0.8486 manats for one dollar. In 2008-2011, this indicator will fall by 5 per cent per year, according to forecasts.

If it were not for the National Bank…

At the same time, the National Bank, which is responsible for the rate of the manat in Azerbaijan, will not allow the manat to get too strong in the short-term, because it is of no benefit to Azerbaijani exporters. "If the National Bank was not taking measures to prevent the manat from getting too strong, our national currency could have strengthened by 20 per cent against the US dollar this year alone," the chairman of the NBA board, Elman Rustamov, recently admitted. He said that 1.4 billion dollars were sterilized on the country's financial market during the year. "For this reason, during this period our national currency strengthened only by 2.6 per cent with regard to the dollar, which is the minimum indicator for oil producing countries," Rustamov said (in Russia this indicator was 8 per cent, Kazakhstan - more than 5 per cent and in Venezuela - 27 per cent). He said that the manat resources placed on the market could secure the liquidity of the economy, and over the past period, money supply in the country has increased by 50 per cent.

We can confidently say that in 2008, the NBA will also make every effort to prevent the currency market from influencing the inflation situation in the country. This means that we should not expect the manat to get too strong. At the same time, of course, it will be impossible to keep the rate at this year's level, which is clearly proved by the fact that the rate of the dollar in the country's state budget is set at 0.81 manats. Those who keep their savings in US dollars have something to think about.

Statistics show that the number of people who keep their savings in US dollars is falling. For example, the overall volume of foreign currency deposits in the general structure of the deposit porfolio fell by 12.9 per cent by the end of October 2007, while in the M3 monetary aggregate, this indicator accounted for 31.4 per cent. As of 1 November 2007 (December information had not been published yet when our magazine was released - editor), the pace of growth in foreign currency deposits in comparison with the same period of last year accounted for 30.5 per cent. The pace of growth in manat deposits by private individuals also exceeded the pace of growth in foreign currency deposits - the population's manat deposits increased by 2.9 times and foreign currency deposits - by 54.5 per cent. In the structure of the deposits of private individuals, the overall volume of foreign currency deposits accounted for 61 per cent by 1 November 2007 against 74.9 per cent by 1 November 2006. Demand deposits in manats increased by 73.4 per cent this year and fixed term deposits - by 3.3 times. As a result, the overall volume of fixed term deposits in the general manat portfolio increased from 33.2 per cent in October last year to 48.4 per cent in October 2007. The manat deposits of private individuals exceeded the pace of growth in the manat deposits of legal entities over the past year and increased almost by 2.9 times. Long-term manat deposits increased by 2.5 per cent throughout the year.

Along with preventing the national currency from getting too strong against the background of the situation on the world market, the National Bank is dealing with another important task: change in the currency composition of the country's strategic currency reserves. The country's currency reserves have already reached seven billion dollars, including the assets of the State Oil Fund and the National Bank. The overall volume of Azerbaijan's currency market is about 10 billion dollars. According to Rustamov, 90 per cent of the NBA reserves are kept in US dollars, and this money is used to service and pay off the country's foreign debt and so on. What will the currency basket be like next year - the government is discussing this for the time being. However, it is clear that there will be fewer dollars in it.