The U.S. dollar lowered against the major currencies on Monday. Market players await remarks from U.S. Federal Reserve chair Jerome Powell later in the day. Other central bank policymakers will likely give traders some monetary policy clues this week, as well.
Forex markets have been turbulent over the past month due to the financial fallout from Russia’s invasion of Ukraine. The economic costs come into sharper focus, with rising energy costs fueling higher inflation.
Ukraine defied Russia’s demand to lay down arms before dawn on Monday in Mariupol. Hundreds of thousands of civilians have been trapped in a currently under siege city. Russian bombardment already laid to waste Mariupol.
Russia still insists on calling the war a “special military operation” to disarm Ukraine, even though this is the biggest attack on a European state since World War Two. Meanwhile, the West says this is a false pretext for an unprovoked war of aggression.
The crisis continues with no defined end on the horizon, and central banks globally are grappling with how quickly to try to hinder soaring inflation. Last week, the Federal Reserve raised its key interest rate by 25 basis points for the first time since 2018. Investors are now focused on the potential speed and size of future rate hikes. They hope that a series of speeches by Fed policymakers this week, starting by Powell on Monday, will provide some clues. At least one agency speaker is due each day this week. In addition, Powell himself will make another appearance on Wednesday.
How is the greenback trading now?
The dollar index dropped by 0.1% to 98.222 against the basket of six peers today. The Federal Reserve’s stance has sharply contrasted with the Bank of Japan. The latter maintained its huge stimulus program and held rates steady on Friday, arguing that the surge in inflation would be temporary. Such a dovish policy has helped weaken the Japanese yen, with it trading near six-year lows against the dollar.
On Monday, the yen plummeted further, falling by 0.1% at 119.230 yen per dollar. Before that, it had touched 119.40 on Friday, its lowest level since 2016. Lee Hardman, the currency analyst at MUFG, noted that the widening policy divergence is continuing to push the Japanese currency to more deeply undervalued levels against the greenback.
Meanwhile, the euro climbed up slightly versus the dollar on the day, adding 0.1% to $1.10585. Market players will watch speeches closely by several policymakers at the European Central Bank, including President Christine Lagarde, this week. Moreover, the Norwegian Central Bank is having a meeting this week. Traders are expecting a rate hike there too.
In Asia, both the Australian and New Zealand dollars tumbled down on Monday, shaving off 0.4% and 0.2%, respectively. Risk appetite remained in check across markets, causing the currencies’ decline.
What about the EM currencies?
Emerging market currencies traded under pressure on Monday. On the market, worries mounted over China’s wobbly economy, along with the raging war in Ukraine. Russia’s ruble climbed up against the U.S. dollar in Moscow trade. MSCI’s EM stocks and currencies index dropped by 0.7% and 0.1%, respectively.
The ruble exchanged hands at 105 to the greenback. Market players await a planned resumption of OFZ treasury bond trading. The Russian central bank has allowed a limited number of additional market operations over the next two weeks. However, it hasn’t been announced yet when trading in instruments like stocks can resume.
Gabriel Sterne, the head of strategy services and global EM research at Oxford Economics, noted that terms of trade have improved for EMs as a whole. Despite that, the major concern is that there may be some fears of contagion and even fire-selling. Investors are dumping exposure because they got stung by Russian and Ukrainian assets.
The broader emerging market stocks and currencies indices seem set to end the month lower. They face rising risks from inflationary pressures, surging commodity prices, and exposure to imports from Russia. Sterne also stated that EM currencies could be in for a little bit of pressure over the next few weeks. The terms of trade effects come through by then. So far, that picture is mixed.
On Monday, Egypt’s pound tumbled by 10.7% after weeks of pressure on the currency. However, Turkey’s lira and South Africa’s rand remained steady against the U.S. dollar.
