Market Responds to the US Dollar's Rally

While Wednesday seemed to be a joyous day for the US dollar as it hit a five-year high, the same day brought with it a gloomy downturn for other market sectors and instruments. What could have led to the ostensible spike in the greenback’s value and how did it shift the market?

The Fed’s Effect 

It is known that changes in central banks’ monetary decisions can inevitably shift the trajectory of the related currencies, and the US dollar is no exception. Accordingly, the Fed Reserve’s monetary outlook is seen as one of the main reasons behind the dollar’s recent rally. 

Last Thursday, Fed chairman, Jerome Powell clearly indicated the central bank’s intention of increasing interest rates by a 50 basis point hike in an attempt to fight surging inflation in the next Fed meeting in May. 

This revelation triggered an increase in the dollar’s value since investors tend to turn to the US dollar in response to the possibility of higher interest rates.  As a response, the US Dollar Index (DX) reached a 5-years high of 103.1 as it rose by almost 0.7% at the time of writing. Moreover, this uptrend has been an ongoing motif since Monday with the US dollar rising by 1.8% on Thursday afternoon. Furthermore, many speculate that the Fed’s rapid interest rate hike cannot be leveled with by most central banks, which further gives an advantage to the greenback in relation to other currencies.

But this rally does not only stop on the brink of the Fed’s decisions. Some analysts posit that since the end of the war between Russia and Ukraine currently seems opaque, the geopolitical aggravations can further strengthen the role of the US dollar’s safe-haven status.  Some market-watchers even deem the US currency’s strength as a “weaponization,” since the sanctions on Russia have certainly presented a united Western front and have reinforced the power of the US currency as it rose to a 2-years high.

Euro and Japanese Yen vs. the US Dollar

The Russia-Ukraine war is not the sole battle affecting the markets, as major fiat currencies struggled to keep up with the greenback’s increasing gains. This may be because investors seem to be turning their heads toward the US dollar, thus leaving behind other currencies that don’t seem to have any sharp monetary tightenings coming their way like the Euro.

The Euro which is considered one of the biggest players in the US Dollar Index’s field took a hit as it fell below $1.06 for the first time since 2017. This has accordingly stunted the growth of one of the most popular forex pairs, the EUR/USD which fell by 0.53% as of the time of writing.

Another major currency and component of the US Dollar Index is the Japanese yen which struggles to keep pace with the greenback as it fell by 1% following the Bank of Japan’s recent monetary policy statement. 

The BoJ, which grapples with inflation and bearish market conditions, revealed in its latest announcement on Thursday that it intends to retain extra-low interest rates. This, in turn, led to the yen’s depreciation as it reached 130.61 against the US dollar for the first time since 2002 on Thursday. 

Gold Loses Its Sparkle

Currencies weren’t the only sufferers from the dollar’s rally. Gold (XAU), a precious safe haven, hit its lowest level in two months. On Wednesday, the yellow metal lost almost 1% of its value. This is because gold has a conflicted relationship with the US dollar. Though this cherished metal is an asset that has an intrinsic value, its worth can ebb and flow in relation to currencies like the dollar. Accordingly, as the US dollar strengthens against other currencies, gold becomes more expensive and pricey to buy, and investors tend to avoid it, thus leading to its fall. 

However, while yesterday’s turn of events seemed deary for gold, some market analysts argue that since gold has proven its resilience in face of inflation, Fed’s hawkishness, and the war in Ukraine in the past few months, there might still be some investors looking to go back into buying this precious metal, which would eventually help retrieve its safe-haven appeal.

What’s Next?

While the present seems to be treating the greenback kindly, the future remains uncertain and might depend on factors like energy prices. Some analysts even claim that the US dollar’s current dominance in petroleum prices could be overshadowed by the possibility of Russia and Saudi Arabia turning away from pricing petroleum in US dollars. For example, in March Russia stated that it might start to accept Bitcoin for its energy commodities instead of US dollars. 

With such volatile market conditions, spiking inflation all over the world, and uncertainty surrounding the war in Ukraine, much of what the future holds for the US dollar and the market, in general, is still unclear. Nonetheless, investors might want to keep an eye out for the Fed’s upcoming meeting in May and keep track of any emerging news that might affect the trajectory of the financial markets.