The results of the Reuters poll on the dollar remain contradictory. Uncertainty related to the war in the Middle East and concerns about rising oil prices and global inflation cloud the medium-term outlook.
Since the conflict began three months ago, the dollar has followed investor sentiment, reacting to changes in risk levels. It rose amid escalation and fell as tensions eased. The initial appreciation caused by the closing of short positions led traders to open long positions and the dollar rose by about 2% (DXY index).
The price of Brent crude oil has risen significantly and is now more than 35% above pre-conflict levels. This jump is likely to have an impact on global inflation. The first signs of this are already being seen in the US and eurozone, where inflation has reached 3.8% and 3.2% respectively, well above the 2% target.
Alex Cohen, currency strategist at Bank of America, notes that the risks of higher oil prices and higher inflation are increasing by the day. He predicts some strengthening of the dollar in the near term, but emphasizes that the risks remain high, especially in the case of a neutral or tough stance of the Federal Reserve.
The euro is more predictable
Still, according to a Reuters poll conducted between May 29 and June 3, the outlook for the euro remains unchanged: it is expected to rise about 2% to $1.18 in three months, to $1.19 in six months and to $1.20 in a year.
The European Central Bank is expected to raise interest rates twice this year, according to a separate survey. The key drivers of the forecast are monetary policy divergence. Central bank rate divergence remains the main driver.
The US Fed is signaling possible easing, while the ECB is inclined to maintain the current level of rates to fight inflation, which provides stability to the European currency. The moderately strict approach of regulators in the Eurozone continues to support the exchange rate amid more cautious signals from the US.
Impact of these changes on the EUR/MDL cross rate
EUR/USD growth will directly strengthen the euro’s position in Moldova’s domestic market, as from 2025 the National Bank of Moldova (NBM) officially uses the euro as the base currency for setting the official leu exchange rate. This means that fluctuations in the global EUR/USD cross rate are now directly projected onto the MDL’s domestic USD and EUR quotes.
Assuming relative stability of the NBM domestic policy and current market quotes (~20.11 MDL to 1 EUR and ~17.31 MDL to 1 USD), a 2% rise in EUR/USD would result in the following proportional changes.
The EUR/MDL (Euro to MDL) exchange rate will rise in sync with the strengthening of the European currency. In 12 months, the expected value of 1 Euro domestically could be around 20.50 – 20.60 MDL. The USD/MDL (Dollar to Leu) exchange rate will reduce the purchasing power of US currency holders on the domestic market. Since the leu is now tightly pegged to the euro, a global weakening of the dollar will cause the USD/MDL exchange rate to fall within Moldova. The value of the dollar could fall to around 17.00 – 17.10 MDL.
Thus, citizens who receive remittances from relatives from eurozone countries in euros will benefit, as they will receive a larger amount for domestic expenditures when converted into lei. Importers of energy and goods from dollarized zones will face the dilemma of how to capture profits. Although purchases for dollars will become slightly cheaper, a rise in the value of the euro traditionally makes European imports (equipment, cars, consumer goods) more expensive, which may trigger moderate imported inflation.
Exporters to the European Union countries with a competent approach can increase their local profitability. Moldovan producers supplying goods to the EU market and fixing revenues in euros will increase their revenues in leu equivalent.
As for the holders of dollar savings, their safety cushion risks “deflating”. Since citizens and companies keeping assets in US dollars will face a gradual decline in their purchasing power on the domestic market, a mass switch to euros may create certain difficulties on the local currency market.
Accounting effect of debt “revaluation”
Paradoxically, the nominal expression of debt in different currencies will move in opposite directions. In dollar terms, the total amount of government debt will appear larger because loans taken out in euros (e.g., from the EU and the EIB) will nominally increase when converted into a falling dollar.
In ley terms (the main indicator for a country’s budget), the debt burden will decrease. Historical precedents show that when the dollar weakens, Moldova’s external debt in MDL is reduced by hundreds of millions of lei solely due to the exchange rate difference, even if new tranches are attracted.
But the costs of servicing the external public debt in MDL will decrease. A significant part of Moldova’s external debt is denominated in US dollars and Special Drawing Rights (SDRs/SDRs) from the IMF and the World Bank. When the euro (and hence the leu) appreciates by 2% against the dollar, the value of dollar-denominated leu loan repayments decreases. To pay the same amount of interest or principal in dollars, the Ministry of Finance will need to allocate less lei from the state budget.
