On Tuesday, the euro soared due to hopes of progress in peace talks between Ukraine and Russia. On the other hand, the U.S. dollar tumbled down ahead of the Federal Reserve policy meeting. One of Volodymyr Zelenskiy’s top aides stated that the war could be over by May; it might even end within weeks because Russia had already effectively run out of fresh troops to keep fighting.
On Tuesday, Brent futures plunged to their lowest level in almost three weeks after Russia indicated it favors the Iran nuclear deal resuming as soon as possible. At the same time, ceasefire talks over Ukraine eased fears of supply disruptions.
Commerzbank forex analysts noted that the drop in oil price reflects the hope that the talks between the Ukrainian and Russian negotiators might lead to an imminent and peaceful solution after all. Some experts also flagged that a recent negative correlation between oil prices and the common currency increased. The euro jumped by 0.5% to 1.0999 against the greenback at last.
However, the single currency lowered briefly after a survey showed on Tuesday that German investor sentiment suffered a record decline in March. That was due to the war in Ukraine and economic sanctions on Russia, making a recession in Europe’s largest economy more and more likely. The eurozone is much more dependent than other areas on Russian energy.
Despite that, ING analysts stated that the euro is mainly driven by sentiment around the Russia-Ukraine conflict today, adding that the forex markets’ approach to peace negotiations was sanguine.
How is the U.S. dollar faring?
The U.S. dollar index plunged by 0.3% to 98.828 against other major currencies. The U.S. Federal Reserve is going to raise rates for the first time since the coronavirus pandemic at its meeting, which concludes on Wednesday. Currently, traders are looking for indications about the pace of future monetary tightening.
Matthew Ryan, the senior market analyst at Ebury, noted that the greenback is pretty high. Traders would need a hawkish surprise from the agency to see a further rise. However, he thinks the bar is quite high for that. Ryan also added that it would be difficult for the U.S. currency to stage any meaningful rally after the Fed policy meeting.
Meanwhile, the Chinese yuan tumbled down by 0.2% to 6.4075 on Tuesday, after plunging to 6.4095 overnight, its lowest level since October 2021. On Tuesday, China announced a great surge in daily coronavirus infections. According to the report, new cases more than doubled from a day earlier, after the country imposed a rare travel ban to the southern technology hub of Shenzhen.
On the other hand, the Japanese yen rallied by 0.3% after dropping to a fresh 5-year low against the greenback at 118.44 overnight. The Bank of Japan seems set to keep monetary policy ultra-loose.
What about the EM currencies?
Some Emerging Market currencies traded flat, while stocks plummeted down on Tuesday. Investors kept risk appetite in check as they waited to see whether the Fed would hike U.S. interest rates this week.
Chinese equities decreased by more than 2%, as the country’s efforts to fight its largest Covid-19 outbreak in two years raised concerns. Investors fear that the mainland’s economic growth will suffer in the first quarter. That weighed on the whole region, with equities in Malaysia and South Korea tumbling down by more than 0.5% each. The Philippines also hit a near seven-month low.
On Tuesday, regional currencies remained largely tepid, though the Thai baht and Taiwan dollar declined alongside the yuan. Economists at Dutch bank ING noted that APAC FX is looking a lot weaker now, including the Chinese yuan. Stock outflows seem to be part of the story. It may be tied to worries of future sanctions if China plays a more active role in the Russia-Ukraine conflict. Thus far, CNY has been a solid anchor in the region. If that begins to shift, there could well be more collateral damage to the rest of the FX market.
The rupiah gained as much as 0.2% today. Indonesian stocks were more cushioned. Analysts expect the country’s central bank to raise rates from record lows in the third quarter. Shares in Jakarta traded lower by 0.2% after soaring by 0.6%. They still fared better than their regional peers.
