Russia rouble hurt by concern over drought impact

Dealers say Russia's forex market is worried about the impact of a long heat wave in central Russia that has sparked forest fires, blanketing Moscow and its suburbs with suffocating smog and prompting many people to leave Russia's main financial centre for cooler and less polluted places.

Although full implications of the drought are as yet unclear, it reinforces risk aversion, increasing the temptation to ditch roubles for safer assets, such as dollars or euros.

"It's odd to keep long positions in the currency of the country where ... harvest forecasts are being revised every day," said a dealer at a major Russian bank in Moscow.

As a result of droughts, Russian authorities imposed a ban on grain exports while market prices for wheat surged towards a two-year high.

In the long run, though, some say the drought could actually benefit the rouble as long as it does not hurt economic growth too much. The drought could curb farm production, sparking a rise in consumer prices which the central bank would probably cap by reducing its currency interventions and allowing the rouble to firm further.

Oil prices -- the rouble's key benchmark -- remained supportive, holding above $80 per barrel and ensuring inflows into the export-oriented economy.

Equity markets were also on firm ground, with Russia's benchmark RTS and MICEX indexes rising 0.8-1.3 percent, following European and Asian stock markets.

However, that was offset by domestic factors and reluctance to implement investments on summer-thinned market.

"The external background is OK but the internal is pretty middling. It's sad in Moscow, the market's climate is not good given all these fumes and smog," said a dealer at a major western bank in Moscow.

Versus the euro, the rouble closed down 10 kopecks, or 0.25 percent at 39.64 after falling to its lowest since April of 39.71, according to Reuters data.

Against the dollar, it was down 13 kopecks, or 0.43 percent at 29.91, heading away from a three-month peak of 29.67 hit last week.

Versus the euro-dollar basket, the rouble was down 12 kopecks, or 0.35 percent at 34.28, remaining in the range of the central bank's so-called "target" interventions.

In July the central bank bought some $0.5 billion on the MICEX exchange, absorbing excessive supply of foreign currencies and thus easing upward pressure on the rouble.

The rouble is unlikely to fall below 34.40 against the basket this week as oil prices remain supportive, said Dmitriy Polevoy, analyst at ING bank in Moscow.

Dealers say an upside move in the rouble may be seen closer to the month-end when Russia's exporters will step up converting dollars and euros to meet domestic monthly taxes.

(Reporting by Andrey Ostroukh; editing by Stephen Nisbet)