Why Did the Euro Fall on Russia’s Credit Downgrade?

One of the big stories in the currency market this morning is news that ratings agency Fitch downgraded Russia’s debt to BBB, which is the second lowest investment grade. The Euro immediately sold off on the announcement as investors fear that the Russian central bank will step into the market and stop the Ruble from falling. Over the past 6 months, the Ruble has dropped 27 percent against the Euro and 55 percent against the US dollar.

The credit rating downgrade raises the risk profile for Russia causing many investors to bail. (Why was Russia downgraded?)

The reason why the Euro has been impacted by the developments in Russia is because the central bank manages the Ruble’s value against a basket of dollar and euros. When the basket was introduced in 2005, it was made up of 10% Euros and 90% dollars. The Euro’s share has gradually increased since then and the basket is now 45% Euros and 55% dollars.

If the central bank intervenes to stop the Ruble from falling, they would have to sell Euros and US dollars to rebalance their currency basket.

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