CURRENCY RESTRUCTURING

Since the beginning of 2025, global financial markets have experienced significant changes. Washington's currency policy, trade conflicts and geopolitical tensions are undermining the dollar's position as a global reserve currency.

According to a 17 June report by the World Gold Council (WGC), the dollar's share of global foreign exchange reserves has fallen from 51% in 2022 to 43% in 2024. Furthermore, the majority of central banks surveyed by the WGC anticipate a further decline in this share over the next five years.

Against the backdrop of growing market volatility, gold is becoming a more attractive investment for central banks, contributing to a rise in its value. According to trading data, in April the price of gold reached a record $3219.23 per ounce, jumping 1.4 per cent in just one day.

The common European currency is also experiencing a triumph.

Dynamics in focus

Since the beginning of 2025, a clear trend of the US dollar weakening has been observed in the international financial markets. In the first six months of this year, the dollar index fell by 10.7% compared to the end of 2024. This was a key factor in the strengthening of the euro, which, in turn, demonstrated robust growth against most major currencies, including the Azerbaijani manat.

The primary factors contributing to the dollar's recent weakness include expectations of a softening of US Federal Reserve monetary policy, moderate growth rates in the US economy, and a subdued demand for the dollar as a protective asset in the context of stabilising geopolitical conditions. Concurrently, investors have been reallocating assets in favour of European markets, where inflationary pressures are abating and interest rate expectations remain elevated.

Further pressure on the dollar is being exerted by the ongoing trade tensions between the US and China. In response to the increase in tariffs imposed by Washington on Chinese goods, Beijing has adopted a symmetrical measure, raising tariffs on US products to 125% from 12 April. This prompted an investor exodus from US assets, with investors opting for more stable currencies such as the Swiss franc, Japanese yen and euro.

In light of these developments, the dollar experienced a 4% depreciation against the Swiss franc, reaching its lowest point since January 2015 at CHF 0.8115. The dollar fell by 1.4% against the Japanese yen, reaching 142.37 JPY. The dollar index fell below the 100 mark for the first time since July 2023, losing 1.2 per cent on the day.

The strengthening of the euro against this backdrop was particularly notable: the exchange rate rose from 1.08 to 1.16 USD/EUR. This has led to a strengthening of the euro against the manat, given the Azerbaijani currency's peg to the dollar.

Impact on the manat

Azerbaijan has adopted a managed exchange rate regime, whereby the manat is fixed against the US dollar. In such a model, any movement of the euro against the dollar is automatically translated into the euro to manat exchange rate as well. However, the actual impact on the country's economy is contingent on a range of macroeconomic factors, which the Central Bank of Azerbaijan (CBA) systematically analyses.

According to the CBA, the regulator closely monitors the dynamics of currency exchange rates of trading partners. The macroeconomic consequences of potential changes are assessed in several directions. These include identifying the causes of any changes, as well as assessing their sustainability, scale and possible consequences for the national economy.

The CBA anticipates a slight depreciation in the nominal effective exchange rate of the manat in the short term, which may result in moderate pressure on the prices of goods and services imported from the euro zone. However, the impact of this factor on the economy remains limited for a number of reasons: the relatively low share of the eurozone in the structure of imports; opportunities to diversify supplies in favour of countries with more favourable exchange rates; a stable balance of payments supported by oil and gas exports; and limited sensitivity of the domestic market to short-term currency fluctuations.

Conversely, if the euro continues to strengthen, there is a possibility of an increase in the prices of European goods and inflationary pressure. In this case, the Central Bank is prepared to utilise the full range of available instruments to maintain price stability, including currency interventions, interest rate changes and liquidity management operations.

Conversely, the CBA considers the likelihood of a long-term decline in the dollar to be low. The historical dynamics of the dollar index demonstrate its high volatility and cyclical nature. Over the past two decades, it has fluctuated between 80.7 and 126 points, with an average of 101.4. This suggests a strong likelihood of a return to the mean in the medium to long term. According to industry experts, the current strengthening of the euro is not expected to become a sustainable trend.

Minor pressure

An appreciation of the euro would inevitably lead to an increase in the cost of imports from the eurozone for Azerbaijan. However,

According to the State Customs Committee, Azerbaijan's foreign trade turnover with the eurozone in January-May 2025 totalled just over $9b, which is equal to 43.2% of the country's total trade turnover. This represents a 20.8% increase compared to 2024. Exports rose to $7.8 billion, representing a 21.5% increase. Imports totalled $1.2 billion, representing an increase of 16.9% compared to the same period last year.

In light of these statistics, industry experts have concluded that the impact of the euro's appreciation is not expected to be substantial.

Firstly, the euro zone's share of the country's total imports is relatively small. Secondly, imports from Europe do not occupy critical positions in the consumer basket and production chain, which reduces the sensitivity of prices to currency fluctuations.

In the short term, this may result in a slight pressure on the nominal effective exchange rate of the manat. However, the regulator has assured us that this pressure will be limited and temporary. Furthermore, European imports may be substituted with supplies from countries offering more favourable currency ratios.

Should exchange rate volatility persist or intensify, the CBA may utilise a range of tools to maintain stability, including foreign exchange intervention to mitigate short-term spikes, interest rate regulation when inflationary pressures rise, sterilisation of excess liquidity to limit the impact of currency fluctuations on domestic prices, and the dissemination of information to manage market participants' expectations and reduce panic.

At the same time, the key factor remains the sustainability of the balance of payments, which remains at a high level due to energy exports and stable fiscal inflows from state-owned enterprises.

Consequently, the global currency architecture is undergoing a transformation. The weakening of the dollar, the rise of the euro and the demand for gold are not temporary fluctuations, but rather reflect deeper structural changes in geopolitics and the global economy. Azerbaijan, a country whose national currency is pegged to the dollar, should certainly not only monitor these trends, but also adapt its macroeconomic policy to the new reality, where confidence in the dollar is no longer in doubt and global players are betting on diversification of reserves.