The US Federal Reserve raised interest rates earlier in March. It hinted at further hikes to combat rising inflation, as long as the economy didn’t fall into recession, as indicated by an inverted yield curve.
The labor market’s resilience suggests the Fed will be confident in raising interest rates again in the coming months, which will support the dollar.
The dollar dropped earlier in March, hitting its lowest level in a week. Investors analyzed the Federal Reserve’s monetary policy outlook a day after the expected rate hike, while the euro climbed as investors watched the Russia-Ukraine talks.
ING analysts stated, “The dollar remains cheap against most G10 currencies in the short-term when short-term rate differentials – normally a key driver of FX moves – are considered.”
US Sanctions on Russia
According to journalist Rafael Poch, a Spanish newspaper columnist, sanctions imposed on Russia for the ongoing attack on Ukraine could jeopardize the dollar’s position as the world’s greatest reserve currency.
Poch questioned whether recent US actions amounted to “the dollar’s suicide,” echoing recent fears about the currency’s direction as many countries attempt to reduce their reliance on it.
On March 24, the International Monetary Fund (IMF) released a report on the “stealth erosion of dollar dominance” during the previous two decades.
The decline “reflects active portfolio diversification by central bank reserve managers,” according to the report. The report then stated that the “shift out of dollars has been in two directions: a quarter into the Chinese renminbi, and three quarters into the currencies of smaller countries that have played a more limited role as reserve currencies.”
Earlier in March, the euro rose 0.4% against the dollar as part of the flight to safe-haven assets subsided. However, it was still down more than 4% versus the dollar since the conflict began, as the conflict escalated and attention shifted to the imminent threat to European energy supplies. The common currency had lost more than 1%, the longest losing streak since March 2020.
The euro fell to $1.10 from a one-month high of about $1.12 earlier this week, as hopes of a resolution to the Ukraine war receded, and increasing inflation posed a new danger to the bloc’s economy. According to preliminary estimates, the Eurozone’s headline Harmonised Index of Consumer Prices (HICP) rate rose to 7.5% in March, up from 5.9% in February and above market expectations of 6.6%.
As headwinds from the Ukraine war worsen inflation, investors are betting that the European Central Bank (ECB) will bring an end to its negative rates period sooner than expected. ECB President Christine Lagarde has already stated that the central bank could end its bond-buying stimulus scheme in the third quarter.
Last week the Japanese yen fell below 122 per dollar, giving up some gains made in the previous three sessions after Japan’s finance minister stated that the Bank of Japan’s (BOJ) goal is to maintain steady price inflation rather than foreign exchange rates. Mitsuhiro Furusawa, a former top currency diplomat, said that a sinking yen reflects Japan’s poor economic fundamentals and trade deficit, but monetary policy is not the best tool for containing yen losses.
In late March, the yen fell to six-year lows as the Bank of Japan’s steadfast commitment to maintaining significant stimulus contrasted markedly with other major central banks’ gradual normalization of monetary policies. In the wake of rising global interest rates, the BOJ also revealed that it undertook unlimited fixed-rate purchase operations for 10-year government bonds this week.
The New Zealand dollar fell to $0.69, a 0.7% loss, despite the US dollar strengthening amid rising wagers on the US Federal Reserve’s aggressive tightening cycle. Traders maintained confidence that the Reserve Bank of New Zealand (RBNZ) will not fall behind the Fed in the tightening cycle as the Kiwi dollar hovered close to a near 5-month high of $0.7 hit Tuesday.
To keep up with inflation, the IMF has urged the RBNZ in its Artice IV review of the economy to make substantial increases to the cash rate soon. In February, the central bank hiked the official cash rate by 25 basis points to 1% and stated that it was willing to raise it in “larger increments if required over the coming quarters.”
Gold is on course to challenge last week’s high of $1966, and dwindling prospects for a Russia-Ukraine peace accord may keep the metal afloat as global share prices face pressure. As a result, as the Federal Reserve expects to undertake a series of rate hikes over the months, a further shift in market confidence is expected to ignite more volatility in gold’s price.
The latest US jobs report continued to show symptoms of a tight labor market, boosting expectations for a 50bps increase in the Fed funds rate in May to manage inflation. Gold fell to $1,930 an ounce on Friday, heading for a more than 1% weekly loss. In March, the American economy added 431,000 jobs, a little less than market projections, lowering the unemployment rate to 3.6%, a new pre-pandemic low.
Concerns about growing consumer costs and the Ukraine situation increased the metal’s safe-haven appeal on Thursday, capping its most significant quarterly rise since the pandemic-driven boom in mid-2020. The continued crisis between Russia and Ukraine may significantly impact gold prices since it raises the possibility of a rush to safety.
Earlier this week, peace negotiations between Ukraine and Russia in Istanbul fuelled hopes of a resolution. While Russia has continued to attack in the eastern region, its commitment to cut back military operations near Kyiv has fuelled optimism that the crisis is entering a new phase, including de-escalation of violence.
The ING analysts suspect that much geopolitical risk premium is available in most assets. Markets appear to have taken an optimistic position well before any results from the peace talks have been announced.
In an interview with Time, Andrew Milligan, a market strategy expert and former UK Treasury official, said that sanctions are projected to result in slightly decreased corporate profits in the United States and Europe, owing to higher energy costs and the exit of technology firms from Russia. In some economies, this effect will eventually reduce GDP growth.
What’s complicated is how economic sanctions on Russia will affect the rest of the global economy. Forecasting anything is difficult, but it’s even more difficult when there’s a war. Experts predict that the impact will be uneven worldwide, with some unexpected winners and losers.
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