Tashkent, Uzbekistan (UzDaily.com) -- The first quarter of 2024 was characterized by significant uncertainty in the global economy and, as a result, in foreign exchange markets. Geopolitical tensions in the Middle East, the Russian-Ukrainian conflict, sanctions against the Russian Federation, rising inflation and tightening monetary policies of leading central banks - all these factors have had and continue to influence exchange rates.

USD/UZS

In 2023, the national currency devalued against the US dollar by 9.92%. Pressure from the dollar does not stop, and in the first quarter of 2024 its exchange rate against the Uzbek soum increased by 2.29%, amounting to 12,620.09.

Let us list the factors that influence this currency pair.

Inflation

Maintaining inflation at a consistently low level is a priority task for the Central Banks of all countries of the world.

With target inflation for developed countries of 2% and about 3–5% for developing countries, in Uzbekistan annual inflation as of January 2024 amounted to 8.6% (Central Bank data). For comparison: according to Eurostat, the annual consumer price index (CPI) in the Eurozone in March was 2.4%, and the annual CPI, according to the US Bureau of Labor Statistics, rose from 3.2 to 3.5% during this period.

Monetary Policy of Central Banks

To curb inflation, central banks are raising refinancing rates. At the moment they are equal to 14% in Uzbekistan, 4.50% in the Eurozone and 5.50% in the USA.

Tightening monetary policy could lead to a slowdown in economic growth and output, an increase in unemployment and a decrease in purchasing power. The US Federal Reserve System (FRS) plans to cut interest rates twice this year, which will likely cause the dollar to weaken against the soum in the fourth quarter. However, the largest Swiss financial holding company, UBS, suggests that there is a possibility that inflation in the United States will not reach the level targeted by the Fed.

This may force the regulator, contrary to its plans, to raise interest rates, which will lead to a large-scale sale of American bonds and stocks. Markets have already taken into account that interest rate cuts in the US will be less significant this year.

The growing US economy and stable inflation increase the likelihood that the Fed will raise interest rates, which would push borrowing costs to 6.5% next year. This, in turn, will help strengthen the dollar against other currencies, including the Uzbek soum.

State budget of Uzbekistan and trade balance

The state budget deficit of Uzbekistan in the first quarter reached 19.8 trillion soums, which is a record for the last 12 years. This could trigger inflation and weaken the national currency.

Forecasts for Uzbekistan’s GDP growth foreshadow a slowdown in the economy. The Asian Development Bank expects its growth to be 5.5% in 2024.

Inflation is likely to remain at 10%, falling to 9.5% by 2025.

Based on this, it can be assumed that the dollar to Uzbek soum exchange rate by the end of 2024 will be in the range from 13,000 to 13,200.

The euro exchange rate is more difficult to predict. We assume that it will fluctuate between 14,300 and 14,520 soums.

In what currency should you keep your savings?

In the face of possible fluctuations in exchange rates due to the economic crisis in the United States and the Eurozone, it is recommended to divide your savings into several currencies and periodically update their distribution.

Choosing options for storing your savings is not an easy task. If you invest in currencies that move approximately in the same direction (for example, the British pound and the euro often “go” in the same direction due to the close relationship of the economies of their issuing countries), then if their rates fall simultaneously, you risk losing a lot.

The optimal solution would be to use multi-directional currencies. For example, if the medium-term trend of the EUR/USD pair is up, this means that the euro is strengthening against the dollar, and vice versa. In this case, it is reasonable to keep half of the funds in dollars and half in euros. This approach, called hedging, allows you to insure savings against the risks of price changes.

In order to minimize possible losses, it is important to know which currencies are moving in different directions. Now it is the American dollar, euro and Swiss franc.

In any case, remember that frequent exchange transactions can lead to financial losses due to bank commissions, so this approach is not recommended.

Is it worth keeping your savings in sums? If you focus entirely on foreign currencies, ignoring the sum, you will still be exposed to risks when it fluctuates in relation to major world currencies. Let’s say the sum begins to weaken against the euro and dollar. In this case, the availability of foreign currency will compensate for your losses. What if the story is the opposite: the soum is strengthening against major world currencies and this has been observed for quite a long time? In such a situation, the lack of UZS savings will play a cruel joke, because you will have to convert foreign currency at an unfavorable rate. So taking into account the amount in your portfolio is also important to find the right balance.

To minimize risks and maintain the stability of savings, it is recommended to keep half of the money in soums in bank deposits, and the other half in equal shares in two different world currencies.

Aziz Abdusalomov, market analyst at Alpari