Ukraine currency slumps as reserves dry up A re-escalation in violence in eastern Ukraine sent the hryvnia to fresh lows on Tuesday, increasing the strain on the country's banking system and tattered finances. After managing to hold the currency steady at around 13 to the dollar throughout October, the central bank was forced to abandon its unofficial peg a week ago in order to halt the rapid depletion of its scant foreign currency reserves. At the same time, tensions with Moscow and the eastern separatists it backs are increasing again, frustrating hopes for a peaceful settlement that would help restore the war-torn economy's footing. Five Ukrainian government soldiers have been killed in the east of the country this week, and the Organization for Security and Co-operation in Europe is reporting rising violence and preparations on both sides for fresh military action. Since the central bank stepped back, the hryvnia has lost almost a fifth of its value against the dollar. On Tuesday alone, it plunged around 6.7 per cent, with an average rate of 15.8817 per $1 set at the central bank's daily dollar auction. That leaves it well below a danger level of 12.5 to the dollar identified by the International Monetary Fund when it agreed its bailout of Ukraine in April. The fund warned that declines beyond that point would cost local banks with foreign liabilities dearly and require bailouts to preserve the solvency of the Ukrainian financial system. Some of the recapitalisation bill will be footed by local or foreign shareholders, but the concern is that the central government will also have to step in, at a time when its finances are already in tatters. The IMF programme now looks wildly off-track, and an increasing number of analysts and fund managers forecast the country will have to default on its sovereign debts and restructure. The hryvnia's slide on Tuesday was mirrored by falls in Ukrainian equities, while the yield on benchmark government debt rose close to the highs reached in October, well before the IMF stepped in. Tim Ash, economist at Standard Bank, said the currency could keep falling because the central bank clearly lacked the reserves needed to defend it, with gas payments falling due and no further bailout payments expected before the end of the year. A weaker currency will further stress the banking sector . . . Ultimately, it will increase the need for a bigger IMF programme to fill the holes," he added. Meanwhile, the rouble came under renewed pressure a day after the Russia's central bank floated the currency. Last week it was announced that the central bank's regular interventions to stabilise the currency would stop. Following some violent losses, however, it had to intervene verbally - saying it would occasionally make large, unexpected interventions as a punitive measure against short selling. On Tuesday, the rouble fell 1.2 per cent against the dollar to Rbs46.39, and was 1.2 per cent lower against the euro at Rbs57.60.