COMMENT-Rouble's collapse may influence FX markets

Russia's rouble, which has collapsed to its weakest level since the low of March 2022 after the invasion of Ukraine, may influence FX markets, boosting demand for safer assets like dollar, euro, Swiss franc, and gold.

November's USD/RUB high 114.49 was only bettered in March 2022 when the pair reached 150. At that point foreign liquidation of Russian assets hurt the rouble while the current sell-off that has largely emanated from within is potentially more damaging and harder to fix.

While purchases of foreign currencies have been suspended which will relieve pressure on the rouble, its weakness is fuelling inflation and mitigating the effect of the much higher interest rate that will slow the economy.

Without the purchase of foreign currencies, the reserves which Russia has used to finance spending may drop further, making it harder for the central bank to effectively manage the rouble and increasing the risk of a bigger drop.

Although there may be reason to think Russia may become more inclined to seek peace, an extremely weak currency, surging inflation and potentially a weaker economy are reason to expect an increasingly negative situation to have risk averse implications for wider currency markets.

With China struggling to revive its economy and the plans of the incoming U.S president likely to stoke risk aversion next year, Russia's woes are additional cause to seek bigger rises for the few assets currently considered safe.

Of those, the dollar which is the world reserve currency is safest and by far the most widely used and liquid of any asset that might rise. With investment in it running at a low ebb, it could rise far and do it quickly.

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