KIEV, May 22 – The fate of the hryvnia plunged into controversy on Thursday when the National Bank of Ukraine’s strategic policy body suspended the move allowing the currency’s sharp appreciation against the U.S. dollar.

The NBU Council, which defines crucial issues such as the currency trading band, used its power to veto the controversial decision by the NBU’s board allowing the hryvnia to breach the declared band.

The development leaves the central bank sharply divided between its two main policy setting bodies, the Council and the Board, fueling uncertainty that may trigger a serious economic impact.

The growing uncertainty over the exchange rate has forced PFTS, Ukraine’s principle stock market, on Thursday to suspend indefinitely all trading in dollars.

“A good advice is don’t sell dollars, because this would obviously lead to losses,” Petro Poroshenko, the head of the Council, said at a press conference. “Don’t make any abrupt financial decisions at the time of uncertainty.”

This comes a day after the Board, the body deciding on day-to-day operations, has decided to abandon the long-term policy of pegging the hryvnia to the dollar.

The decision let the national currency appreciate 4% against the dollar overnight, beyond the level that the NBU had originally pledged to defend. The hryvnia rose to 4.85 to the dollar from 5.05, breaching the band of 4.95 to 5.25 that had been earlier established.

The NBU Board can override the veto from the Council at a meeting on Friday if two thirds of its members vote to confirm the appreciation.

In sign of defiance to the veto, the NBU on Thursday has left the hryvnia’s official exchange rate at 4.85 to the dollar, the rate that will be in effect through Monday.

The Council voted to recommend the board to immediately set the exchange rate between the hryvnia and the dollar to within the earlier declared band.

This recommendation was backed by all Council members, except for Volodymyr Stelmakh, the governor of the NBU, who had abstained in the vote, according to a person familiar with the issue.

The office of President Viktor Yushchenko on Thursday slammed the NBU Board’s decision to steeply appreciate the hryvnia, suggesting the bank should have honored the declared band.

“I cannot support yesterday’s decision by the Board,” Oleksandr Shlapak, the first deputy chief of staff at the Yushchenko office, said at a press conference. “I think the debate is ahead on whether to apply a different exchange rate or to stick within the band.”

“I have no doubts the exchange rate will get back to where it was,” Shlapak said. “So, I wouldn’t advise to sell dollars because the situation will drastically change by the end of the year.”

Prime Minister Yulia Tymoshenko has been pushing hard for the hryvnia’s appreciation, a move she believes would help the government to fight skyrocketing inflation.

Inflation exceeded 30% if measured between April and April 2007, but critics said it was the result of Tymoshenko’s populist campaign of rampant social spending ahead of the presidential election next year.

The Regions Party, the largest opposition group, on Thursday accused Tymoshenko of meddling with the exchange rate policy and warned this may hurt the economy.

“This is not acceptable,” Andriy Kliuyev, a former deputy prime minister and a senior member of the Regions Party, said in a statement. “This will negatively affect the economy. The rate of 4.85 hryvnias to the dollar opens the door for imports and kills exports.”

These concerns were echoed by the NBU’s Council, which estimated the appreciation may boost Ukraine’s foreign trade deficit to $15 billion in 2008 from $7.3 billion in 2007 and $4.4 billion in 2006.

“The deficit may reach $15 billion by the end of the year,” Poroshenko said, adding the rapid expansion may be an economic threat of its own. “The ratio of the deficit to the GDP must attract attention of the Ukrainian authorities.” (tl/ez)