By James Saft
(Reuters) – One clear winner from Cyprus’S imposition of capital controls is the U.S. dollar, which stands to benefit from public and private flows after another round of damage to the euro’s reserve currency status.
The euro fell to its lowest against the U.S. dollar in four months on Wednesday, falling below $1.28 after Cyprus moved to limit the flow of money out of the country in the aftermath of a bank bailout which singed foreign bank lenders and depositors alike. The dollar was just below its 52 week high against a trade-weighted basket of currencies, indicating that its strength was broad-based.
Following a bailout package that includes a substantial hit to uninsured deposits, many of them Russian, Cyprus imposed a limit of 300 euros per day on account withdrawals and set a limit of 5000 euros per month on credit and debit cards used abroad.
This should surprise absolutely no-one. Whacking depositors was probably the right thing to do, but it is a policy with substantial costs, and not just to Cyprus.
The introduction of capital controls actually will mark the effective debut of a new currency, the “Cyprus euro.” As a euro held in Cyprus is no longer a unit of value with free movement, it will no longer be worth as much as a euro held in France or under a mattress in Moscow.