Daily Market Pulse

Dollar puts a brake on its rally

7 minute read


The greenback dipped slightly versus its major counterparts in the early American session on Monday, but it had no trouble regaining its strength as safe-haven flows continued to dominate markets. The U.S. Dollar Index appears to have entered a consolidation period on early Tuesday after climbing 0.73% on Monday. The Russian and Ukrainian delegations held their third round of talks yesterday, but neither side made any headway toward a truce or ceasefire. Furthermore, the European Union intends to reduce Russian gas imports by two-thirds in the coming year, and the United States might act unilaterally to restrict Russian oil imports without the assistance of its European allies. In other news, the barrel of West Texas Intermediate rose 5% on Monday and was last spotted at $122.70, up 2% on a daily basis. On Monday, the S&P 500 Index fell about 3%, while U.S. stock index futures were down between 1.2 and 1.5% in the early European morning. In the coming months, the U.S. economic calendar will include the January Goods Trade Balance.


The Euro closed 0.80% lower on Monday before reversing its gains on Tuesday morning. As the outlook for the bloc's economy darkens and demand for safe-haven assets rises as the war in Ukraine intensifies, the Euro sank further in the second week of March to the lowest levels since May 2020. The United States and its allies are currently debating a ban on Russian oil imports, raising the danger of broader inflationary risks and impeding economic growth. Meanwhile, the European Central Bank (ECB) will make its monetary policy decision and reveal its newest macroeconomic estimates on Thursday, with markets expecting no adjustments in borrowing prices despite record-high inflation due to present geopolitical risk. Elsewhere, The Stoxx Europe 600 index climbed more than 1%, putting it on track for its first gain in four days, as the prospect of more central-bank assistance boosted the mood. Going forward, fourth-quarter employment change and GDP figures will be included in today's European economic agenda.


The Pound Sterling closed at -1.10% lower in the last session and continued to edge lower this morning. This occurred as the demand for safe-haven assets grew in tandem with the intensification of the conflict in Ukraine. Fears of stagflation pushed markets lower to a five-month low. Oil prices soared to 14-year highs above $120 a barrel amid speculation that the U.S. and its European allies may impose a ban on Russian energy imports as a result of the ongoing invasion of Ukraine. Meanwhile, fears over the supply constraint in oil markets were not alleviated due to uncertainties regarding the Iran discussions and the reinstatement of the nuclear deal. In terms of statistics, Retail sales in the United Kingdom increased 2.7% on a like-for-like basis in February 2022, down from an 8.1% increase the previous month, as Storm Eunice and plummeting consumer confidence impacted retail activity. In other news, the FTSE 100 rose on Tuesday after plunging to a more than 5-month low the day before, aided by a bounce in financials. Meanwhile, Moscow has vowed to shut off gas supplies to Europe if President Biden's administration considers restricting Russian oil imports in punishment for Ukraine's incursion.


The Japanese Yen closed 0.44% lower in the previous session against the greenback. On Tuesday, the Yen held steady against the U.S. dollar, having been range-bound since mid-February as safe-haven flows to the currency prompted by the Russia-Ukraine crisis offset pressure from a rising dollar. Meanwhile, Japan's core inflation rate fell to 0.2% in January, missing expectations and continuing considerably below the central bank's objective. The Bank of Japan has emphasized repeatedly that it will maintain ultra-loose monetary policies in order to boost economic recovery and meet its 2% inflation objective, displaying one of the most dovish attitudes among global central banks.  The governor of the Bank of Japan, Haruhiko Kuroda, also ruled out policy tightening in response to an increase in inflation caused by rising fuel prices, emphasizing the need to wait for wage growth to start up.


The Loonie closed 0.62% lower in the previous session before extending its losses with tepid gains this morning. The Canadian currency fell against the US dollar in the second week of March, closing down on a two-month low set on February 24th, as investors assessed heightened oil price volatility and Russia's continuing attacks in Ukrainian cities. Following concerns that Russia's military may be targeting civilian sites in Ukraine, crude oil prices soared to their highest level since 2008. On the monetary policy front, the Bank of Canada raised its overnight rate goal by 25 basis points to 0.5%, the first increase since October 2018, and stated that it will utilize its monetary policy tools to bring inflation back to the aim of 2%. Following last week's bullish momentum, Canada's S&P/TSX Composite index reversed early gains to settle 0.5% on Monday, as investors continue to examine the effects of rising energy prices.


The Mexican Peso plunged 1.79% in the last session before extending its losses on Tuesday morning. As the Ukraine-Russia situation drags on, the Mexican Peso has taken a hit. The U.S. is choosing to rock the boat even more by imposing an embargo on Russian oil imports, while the EU is preparing to sell massive joint bonds to fund energy, triggering the risk-off sentiments. Meanwhile, in February 2022, consumer confidence in Mexico fell to a five-month low of 43.4, unchanged from the previous month. The current assessment of the household's financial status has deteriorated, as have expectations for the country's economic situation. In other news, Mexico's central bank, Banxico, raised interest rates for the sixth time in a row in February, pushing borrowing costs to 6%, the highest since April 2020, due to concerns about inflationary pressures.


The Chinese Yuan closed 0.09% higher in the previous session against the greenback. On Tuesday, the Yuan strengthened against the U.S. dollar, staying around four-year highs, as safe-haven bids were bolstered by the currency's stability despite geopolitical uncertainty in Ukraine. Due to a trade surplus position in recent years, onshore enterprises' large foreign currency receipt holdings made the Yuan somewhat resistant to external risk aversion. On Tuesday, the Shanghai Composite plummeted 2.35% and the Shenzhen Component fell 2.62% as mainland stocks extended their losses after hitting a 20-month low the day before. As disruptions in the global energy supply drove up oil prices, harming energy-importing Asian economies, investors began to examine the possible economic impact of the Russia-Ukraine conflict.


The Brazilian Real closed 0.33% on Monday as the global risk aversion caused by the war in Ukraine overshadowed the boost that the surge in commodities has provided to the Brazilian currency. The conflict in Ukraine has driven up commodity and energy prices, creating concerns about global inflation. Brent crude prices rose to near $140 on Monday after the White House indicated it was in talks with other countries about imposing a ban on Russian petroleum imports. Also, the intensifying crisis in Ukraine has helped currencies of countries exporting oil, metals, corn, wheat, other commodities as fears of supply interruptions have driven prices for these products to multi-year highs. Domestically, high-interest rates in Brazil, as well as the likelihood of more increases in the Selic, have aided the flow of dollars into the country and the Real's recent strengthening. In other news, financial market economists boosted their inflation forecast for 2022 for the eighth week in a row, and they started to forecast a higher level of activity this year as well. Bank analysts' projections for the IPCA increased from 5.60% to 5.65% in 2022. On the other hand, the prediction for a high GDP has risen to 0.42%.


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