Romanian currency leu near record low after policy rate cut

The Romanian leu fell to a near record low on Thursday with the dollar index rallying to a 12-year high and disinflation woes expressed by Romania's central bank after Wednesday's rate cut continued to weigh on the currency.

USD/RON fell to 3.8145 on Thursday, its highest since July 2012, from the previous close of 3.7989. With another 320 pips, the pair will hit a record high.

At the high of the pair on Thursday, the leu was down 2.8% so far this month and 16% down from the close of June when global crude prices began the big slide sending the dollar higher.

The USD index rallied 2.4% within the first five days of the new year and has broken through the 92.43 mark to a 12-year high of 92.45 on Thursday.

Romania's central bank cut the main policy rate by 25 basis points to a record low of 2.5% citing weaker consumer sentiment and the below target inflation rate.

The Romanian move came as the eurozone fell into deflation for the first time in five years and amid expectations the Eurozone would soon announce a broader bond buying programme.

Many analysts expect such an ECB move to prompt other economies in the region to follow suit.

The National Bank of Romania had started the latest rate cutting cycle in August itself and Wednesday's cut was in response to the November inflation rate that came at 1.3% when authorities are targeting a range of 1.5-3.5%.

The NBR has reduced its policy rate by 1 percentage point in recent meetings in response to weakening consumer sentiment and a slide in oil prices.

The European Central Bank is expected to respond to the deflation with a wide-ranging government bond buying programme, which analysts forecast will prompt more cuts in borrowing costs elsewhere in central and eastern Europe.

According to NBR governor Mugur Isarescu inflation would remain below 1.5% in Romania for at least a few months. He also said that the bank had significant room to work over interest rates.