The U.S. Dollar lost ground yesterday afternoon and continues to trade around those levels following negative news on the geopolitical front.
Overview
Indeed, the up-and-down game of negotiations between Russia and Ukraine continues with the Kremlin announcing that reports of “positivity” in talks were not accurate. In fact, fighting has spread to regions of Ukraine near the border with Poland while Kyiv keeps getting hit. President of Ukraine Volodymyr Zelensky addressed the U.S. Congress live via video call and pleaded for a declaration of a no-fly zone, a step that if taken could be taken as a declaration of war against Russia. Isolation financially continues to be the measure used by the U.S. and its European allies.Yesterday’s main risk event financially resulted in a much-expected 25-basis-points interest rate hike by the Fed, but the market’s reaction was not one of fear, but rather an optimism. As we interpret it, the Fed’s early establishment of the dot-plot featuring as many as seven increments for the year exudes confidence in the economy that it is resilient and strong enough to grow regardless of the added borrowing costs.This take does not favor the buck, which had already been building strength for months based on this very well telegraphed course of action. Instead, markets seem to believe things will work out and the risk-on sentiment benefitted all assets against the buck. The conflict and COVID concerns brewing from both Asia and Europe are being ignored as far as factors preventing the Fed from doing what it planned and laid out for markets.
What to Watch Today…
- No major economic events are scheduled for today
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EUR
The Euro is about half a percent away from being back to the levels where it started the month of March after climbing the post-Fed conference. The buck’s demise certainly elevated Euro’s value based on the idea that the Fed will hike gradually and perhaps not go beyond 25-basis-points bumps each meeting left this year.
There is also potential for Euro to strengthen further down the line if the European Central Bank maintains its recent shift towards tightening, eliminating bond purchases beyond just the Pandemic Emergency Purchase Program (PEPP) and looking to hike its benchmark interest rate once for the year. Any news that improves the chances of a solution to the conflict will give Euro a boost. We are basically rooting for that at this point.
JPY
The Japanese Yen is the exception to all the moves against the greenback with a tumultuous week for Japan. A strong earthquake hit the region of Fukushima, which is now under a Tsunami advisory. This is all in the midst of worries that Asian nations are experiencing COVID flare-ups, putting the country once again on alert.
The planned Bank of Japan meeting resulted in Governor Haruhiko Kuroda expressing commitment to more stimulus for the economy despite global inflationary pressures and central banks West thinking more to tighten the reins. We shall see if further escalation of the Ukraine invasion and natural disaster cause even more volatility.
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