- US Dollar[1] DXY index hit a fresh 2022 record after the Euro[2] sank on tensions in Ukraine
- Greenback strength persisted after Fed Chair Powell tempered bets on a 50 bps hike
- A lull in hostilities from Russia may see haven flows reverse course and drag USD[3]
The US Dollar rocketed upward last week, hitting the highest levels since May 2020, as the situation in Ukraine deteriorated[4]. That firmed up the chances that the West will lobby additional sanctions on Russia, increasing the already severe supply shock roiling markets. Russia’s assault on Ukraine has had an outsized impact on the Euro[5], mostly due to Europe’s high volume of trade with Russia. EUR/USD[6] shed nearly 3% last week, dropping to its lowest level since May 2020. That provides an outsized advantage for the US Dollar DXY index, which is heavily weighted against the Euro.
A surge in commodity prices has been one of the most prominent spillover effects of Western sanctions. That has bolstered already lofty inflation expectations across major economies. Germany’s 2-year breakeven rate – the gap between the 2Y Bund yield and its inflation-indexed counterpart – rose to a record high of 4.24% on Friday. European gas prices extended higher into record territory on Friday. Europe is particularly sensitive to further escalations due to its geographical proximity and trade with Russia. The Euro is likely to remain bogged down until the tides turn toward a diplomatic solution, which should underpin USD strength in the interim.
Elsewhere, A strong US jobs report on Friday[7] failed to reignite bets for a 50 basis point (bps) hike at the March FOMC[8] meeting. Federal Reserve Chair,
