Who inflated the exchange rate?

Publish date: 30-06-2010
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The Romanian Leu registered its worst exchange rate in history on Monday, of 4.3257 Romanian Lei/Euro, up 4.5 pennies since Friday. This time, the fall of the Romanian Leu wasn't due to a speculative attack but to the fact that large companies, wealthy Romanians, as well as regular people, after a week during which pension cuts and VAT increases were annulled and approved, ran to the banks and exchange offices to buy foreign currency, scared of massive depreciation.

Dealers also point the finger to the statement of a National Bank of Romania Director, who said that an explosion of a the exchange rate up to 6 Romanian Lei/Euro is possible. Surprisingly, the National Bank of Romania intervened only in statements, explaining the record maximum exchange rate by a "psychological shock". The National Bank of Romania's reserves of more than 34 billion Euro are sufficient to maintain the exchange rate stable for at least a year, say economists.

Mihai Tanasescu, Romania's representative to the IMF, said everybody should calm down and underlined the fact that, as per the Fund's calculations, Romania's "equilibrium exchange rate" is of 4.1-4.2 Romanian Lei/Euro.

Scared by the possibility of massive depreciation of the Romanian Leu, Romanians, either business owners or mere employees, ran to the banks and exchange offices and exchanged their Romanian Lei for Euro. The result was pretty easy to anticipate: the large demand for foreign currency lead to a new historical maximum, Romanians practically depreciating the Romanian Leu for fear of depreciation itself.


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