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Ukraine forex market rocked after bank removes peg

A move by Ukraine's central bank to ditch an unofficial peg for the hryvnia has plunged the foreign exchange market into confusion, with buyers of hard currency putting off purchases and sellers holding out for higher levels.

The hryvnia lost 30 percent against the dollar to trade at 24-25 on Thursday after the bank moved closer to a free float by abandoning the foreign currency auctions that had effectively pegged the exchange rate.

A Ukrainian national flag flies outside the Ukraine central bank in Kiev, Ukraine.
Vincent Mundy | Bloomberg | Getty Images
A Ukrainian national flag flies outside the Ukraine central bank in Kiev, Ukraine.

On Friday, traders quoted levels ranging from 19.50 to 26.50 hryvnias to the dollar, saying only a few deals had been concluded, with some banks reluctant to even quote a rate, fearing the wrath of the central bank if it was too weak.

"Those who can postpone (having to sell hard currency) are postponing until the last moment, not believing that it (the slide) will stop anytime soon,'' said one dealer at a major Ukrainian bank.

The dealer said the hryvnia had weakened to around 26.50 a dollar, while another trader said commercial banks were selling dollars to clients in the range of 19.50-21.00 hryvnias.

According to Reuters data, the bid price for dollars had fallen to 19.00 hryvnias by 1110 GMT from 24.50 at the opening, while the offer price moved to 19.50 from 25.50.

Most traders said there was little that could prop up the currency, which has been sliding since February last year, when street protests forced a Moscow-backed president from power.

Since then Russia has annexed the Crimea peninsula from Ukraine and a separatist rebellion has raged in the east, though the French and German presidents were taking a peace initiative to Moscow on Friday following talks in Kiev on Thursday.

The former Soviet state desperately needs funds from donors to fill an estimated $15-billion funding gap to withstand the financial crisis, deepened by a surge in fighting in eastern regions where pro-Russian rebels have seized new ground.

"We are advising customers who need dollars to wait a week if their businesses can wait,'' the trader at a Ukrainian bank said, adding that then sellers may become more keen to sell dollars at weaker rates.

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