Daily Market Pulse

Dollar remains muted amid geopolitical and inflation risks

7 minute read


The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, closed 0.06% lower in the previous session and appeared to be heading down on Wednesday morning. The positive risk sentiment faded in the second half of the day on Tuesday as the United States imposed sanctions on Russia; targeting the country's sovereign debt, financial firms, and elites. This followed Moscow's order to send troops into two separatist regions of Ukraine. Wall Street's main indexes finished the day in the red and the 10-year U.S. Treasury bond yield fell for the fourth day in a row. This morning, investors continued to closely monitor developments around the Ukraine situation, as well as increasing inflation and ensuing Federal Reserve rate hikes. Fed Governor Michelle Bowman stated on Monday that a 50 basis point rate rise at the March meeting is possible if PCE inflation, which is due later this week, exceeds forecasts. Policymakers are united on a strategy and preparing markets for a gradual increase in interest rates beginning in March. Moving forward, traders will see wider market sentiments and geopolitical updates to drive dollar prices further. 


The Euro closed 0.11% higher yesterday before extending its gains modestly this morning. This comes as traders continue to keep a close eye on the Ukraine situation. Meanwhile, Russian President Putin recognized the two self-proclaimed separatist republics in Ukraine and dispatched troops to the territories, while the United States and Europe imposed further sanctions on Russia. Furthermore, investors are looking for additional hints on the European Central Bank's (ECB) monetary policy as price pressures in the Eurozone continue to rise. However, the odds that the central bank will take a more cautious stance due to the risks posed by the Ukraine conflict are growing. The ECB is still expected to raise interest rates by 10 basis points in July, but betting on a 50 basis point increase by the end of the year has dwindled. Moving forward, market participants will hear statements from ECB policymakers Elderson and De Guindos, both of whom are scheduled to speak today in the first half.


The Pound Sterling closed 0.12% lower although it regained its pace and nudged higher this morning ahead of the Bank of England (BoE) Governor Andrew Bailey’s speech. As traders reacted to a softer-than-expected set of sanctions against Russia for ordering soldiers into Ukraine's separatist areas, the British pound remained steady near a four-week high reached earlier this week. Adding to the upside pressures, the case for the Bank of England to decide on a third consecutive interest rate hike at its next meeting has strengthened following strong signs of economic recovery including better-than-expected PMI readings in February and a near three-decade high inflation rate in January. Moving forward, the Bank of England will hold monetary policy hearings and Governor Andrew Haley will deliver a speech on inflation risks and the monetary policy outlook.


The Japanese Yen closed 0.30% lower in the previous session against the greenback. The currency stabilized against the U.S. dollar on Wednesday, after losing some ground the previous session as safe-haven demand for the currency eased and traders assessed Western sanctions imposed on Russia following Moscow's order to send troops into two rebel regions of Ukraine. Meanwhile, Japan's core inflation rate fell to 0.2% in January, missing expectations and maintaining a rate considerably lower than the central bank's target. Toyoaki Nakamura, a member of the Bank of Japan's board of directors, has stated that the BOJ will retain its ultra-loose monetary policy in order to help the economic recovery and attain the 2% inflation objective. His remarks echoed those of other policymakers, emphasizing one of the more dovish attitudes among major central banks.


The Loonie closed 0.13% lower in the previous session and continues to edge lower this morning. The Canadian dollar has been trading near one-year low levels set on December 20th, boosted by rising oil prices and the potential of higher interest rates. West Texas Intermediate (WTI) crude oil, a major Canadian export and a major driver of Lonnie's performance rose to levels not seen since 2014 as global oil supplies tightened and geopolitical risks in Eastern Europe remained, with the U.S. and its allies announcing sanctions against Russia after it recognized the independence of Ukraine's breakaway regions and ordered more troops to be sent to Luhansk and Donetsk. In other news, the Toronto Stock Exchange S&P/TSX composite index plummeted more than 0.5% on Tuesday to levels not seen in more than three weeks, with rising tensions in Eastern Europe supporting higher commodities prices but also risk aversion.


The Mexican Peso closed 0.03% higher yesterday and continued to rise modestly on Wednesday morning. Since late January, the Mexican peso has been climbing against the U.S. dollar, reaching its best level since October 2020. This was supported by rising interest rates while investors around the world continue to monitor events in Eastern Europe. On concerns about inflationary pressures, Mexico's central bank raised interest rates for the sixth time in a row in February. This raised borrowing prices to 6%, the most since April 2020. In other news, the Mexican stock index S&P/BMV INMEX rose 1.01% since the markets opened this morning, mirroring its Wall Street peers.


The Chinese Yuan closed 0.18% higher in the previous session against the greenback. The Yuan rose against the U.S. dollar on Wednesday, reversing intraday losses from the previous session and soaring to 4-year highs as the currency was supported by solid settlement needs driven by strong Chinese exports. Analysts also speculated that Western sanctions against Moscow may help the Chinese currency in the long run by inducing Russia to expand its Yuan holdings. The actions came despite the People's Bank of China recently injecting additional liquidity into the financial system and lowering various policy loan rates. In other news, the Shanghai Composite surged 0.93%, while the Shenzhen Component rose 1.9% on Wednesday, as foreign investors repurchased select mainland shares a day after being unnerved by growing tensions between Russia and Ukraine.


The Brazilian Real closed 0.71% higher in the last session against the greenback. Once again, the Brazilian currency gained the spotlight against its peers in emerging currencies. The unfolding of PEC for fuels gained relevance, with the mayor Arthur Lira stating that the PECs that mess with fuel taxation are ruled out at the moment. The decision brings some relief to the market that was expecting another round of spending. On the political risk front, the premium linked to political risk is apparently dissipating as the candidate and former president Lula move towards the center of the political spectrum. Investors can be optimistic about Lula's statements about a more moderate approach, as well as his potential alliance with the ex-governor of SP Geraldo Alckmin, thus discarding the concern that a return from the former president would be bad for assets. Meanwhile, as we await more concrete presidential campaigns, the foreign capital flow continues to grow due to the upward trajectory of the Selic and with the interest rate differential in relation to other economies.


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