The greenback has loosened its grip a bit by the end of the working week. Dollar bulls seem to have decided to take a break after recent long positions. The USD index, which once again hit the barrier in the area of 99.00 yesterday, moved into negative territory today, testing support at 98.50. Traders have slightly "let go" of the situation around the conflict in Ukraine and focused their attention on riskier assets, such as the euro. Against this background, the EUR/USD pair has somewhat stabilized.
A clear break up of the weekly symmetrical triangle will give hope to bulls of the pair, but the previous support line from March 07, close to 1.1075, defies the upward momentum. Meanwhile, pullback movements remain elusive beyond the declared triangle support line, around 1.0960. According to JMP Securities specialists, a lot has happened in a short period of time, and market participants are trying to understand these events.
It is obvious that the euro is still experiencing difficulties with growth, while its counterpart - the protective US currency - is kept afloat due to the geopolitical background, which still leaves much to be desired. Since the beginning of the Russian-Ukrainian conflict, the US dollar has risen by more than 2% against its main competitors. "The greenback is still strong and is likely to strengthen if tensions continue to rise," Mobius Capital Partners believes.
At the same time, some experts point out that Washington's attempts to use the dollar as a weapon threaten its dominance in the international arena, undermine confidence in the USD as the main reserve currency and accelerate the transition to alternatives.
Cryptocurrencies Get a Chance
The month that has passed since the beginning of the largest geopolitical catastrophe in Europe has dramatically changed attitudes to many things, says BlackRock CEO Larry Fink. He believes that military actions in Ukraine and Western sanctions against Russia will increase the popularity of cryptocurrencies. Now the vast majority of countries in the world use the US dollar for international financial transactions. However, the events in Ukraine will force them to assess the dependence of their economies and financial flows on foreign currencies, Fink notes.
"The consolidated position of the G7, the European Union and the United States on sanctions against Russia has forced countries to think about alternative sources of payments and transfers of funds. The threat of disconnection from SWIFT shows the unreliability of any private decisions, and the secondary nature of sanctions makes it pointless to create payment platforms in interstate unions," he said. The possibility of selling gas and oil to so-called "friendly" countries for bitcoins, except for national currencies, was admitted on Thursday by the chairman of the State Duma Committee on Energy Pavel Zavalny. "We have been offering China and Turkey to switch to settlements in national currencies for a long time. The set of currencies can be different. If there are bitcoins, we will trade in bitcoins," the deputy said.
Yuan comes out of the shadows
The efforts of the Chinese authorities to internationalize the national currency are attracting more and more attention. Earlier this month, at a hearing in the Senate Banking Committee, Federal Reserve Chairman Jerome Powell said that the conflict in Ukraine could accelerate Beijing's efforts to develop alternatives to the international payment infrastructure dominated by the dollar. Strategists at Goldman Sachs predict that the yuan will surpass the yen and pound by 2030, becoming the third largest reserve currency in the world, and Morgan Stanley analysts believe that the Chinese currency will account for up to 10% of global foreign exchange assets in the next decade. Although the yuan may not surpass the dollar, it can become another reserve asset that will eventually work side by side with the USD, according to Invesco.
After reports emerged that Saudi Arabia is considering using the yuan to settle oil deals with China, some experts started talking about weakening the hegemony of the greenback in the global commodity market. "It will be a real explosion. Therefore, such predictions in the Western media are more like pre-prepared signal tests," said Zhang Yugui from Shanghai University. According to him, the cycle of a country's currency, acting as the dominant international currency, is usually about 100 years.
"If this point of view is correct, then from the moment of the creation of the Bretton Woods system in 1944, there is very little left for the hegemonic dividend cycle of the dollar before its fall," said Ch. Yugui. He believes that in the middle of the XXI century, the United States will lose its status as the most important economy in the world, as a result of which new centers of monetary domination will appear. The petrodollar system will either change its structure or be partially replaced, the expert concluded. At the moment, the yuan still seems secondary in the financial markets, according to strategists at PineBridge Investments. "China has economic power that matches the old hegemonic power of the United States, but it has yet to build the infrastructure to become a financial center," they said.
This point of view is shared by Standard Bank analysts.
"The problem in the case of China is that the very capital controls that help protect the currency and the financial system from the vagaries of Fed policy and dollar volatility do not allow the yuan to become a serious rival to the dollar," they said. As for other alternatives, they also have disadvantages. In particular, cryptocurrencies that are free from fiat shackles are too new and unstable to claim global status.
Thus, the US dollar remains the world currency in all respects, since it is easier said than done to find a worthy replacement for it. "We are not at the stage when the dollar can be challenged," Brandywine believes. According to the Bank for International Settlements, almost 90% of transactions on the global foreign exchange market take place with the participation of USD. The US currency also accounts for about 60% of the foreign exchange reserves of all central banks in the world. The euro is the most widely used currency in reserves after the US dollar, but its reputation still suffers because it was almost "buried" during the eurozone debt crisis.
On Friday, the greenback is declining correctively against the euro after a prolonged growth. The dollar rose by 0.4% against the single currency during the week. Investors played back the Fed's willingness to act more aggressively if necessary and raise the rate by more than 25 basis points. On Monday, Fed Chairman Jerome Powell said that the US central bank should act quickly to reduce inflation, and that if necessary, it can raise interest rates more than usual. This was followed by a "parade" of FOMC members who came to the podium to repeat their boss's call for immediate and, if necessary, aggressive actions to reduce the inflation rate three times higher than the target level of 2%.
One of the last speakers was Chicago Fed President Charles Evans, who confirmed his intention to support a 0.5% rate hike in May, albeit with a caveat about the need to be careful. According to him, at this rate, the central bank will reach a neutral level of rates by March next year. At the moment, the probability of a 50 basis point rate hike at the next Fed meeting is already 77% and it looks like it will continue to grow, supporting the dollar. Meanwhile, representatives of the European Central Bank, led by Christine Lagarde, who spoke this week, did little to support the euro. ECB Governing Council member Frank Elderson said on Thursday that the latest analysis confirms that current circumstances pose new obstacles to economic growth in the eurozone.
"The prospects that prevailed before the entry of Russian troops into Ukraine were quite favorable. Our commitment to medium-term price stability is unwavering. We are ready to adjust our tools," he said. Another ECB board member, Isabelle Schnabel, said that the central bank would consider extending the money printing program after this summer if the eurozone economy falls into a deep recession due to the conflict in Ukraine. "The central bank has left the door open in case events change for the worse for the eurozone, which is heavily dependent on Russian gas and other raw materials. If we fall into a deep recession now because of the Ukrainian crisis, we will have to rethink this. Otherwise, we will stop buying bonds in the third quarter, and once we do that, we will be able to raise rates at any time depending on how inflation develops," she said. In addition to the actions of the leading central banks, events on the geopolitical front remained in focus this week. The persistence of tension in the international arena supported the demand for the dollar as a safe haven asset.
On Wednesday, US President Joe Biden arrived in Europe to strengthen the "incredible unity" that was built with the partners there to consult on the next steps, the adviser to the American president on national security, Jake Sullivan, informed. According to him, during the planned events, it was supposed to discuss the provision of military assistance to Ukraine, as well as sanctions pressure on Russia. Although the officially announced measures are aimed at further consolidation of Western countries, it is obvious that the United States uses them to strengthen its own position in the world and impose the American agenda. "Given the proximity of the eurozone to Ukraine in a literal geographical sense, as well as the consequences of sanctions, a lot of money is flowing out of Europe and they are sent to the United States," Quant Insight analysts noted. "If we get another package of sanctions, then people say that the blow to the West will disproportionately fall on Europe," they added.
The greenback is approaching the end of the week at lower positions. However, the continuing risk of a deterioration in market sentiment due to geopolitics and the threat of rising commodity prices still justify a stronger dollar and weaker European currencies, according to ING economists. "Russia seems determined to use an unexpected range of tools to counter Western sanctions. All this continues to signal significant upward risks for commodity prices and downward risks for risk appetite. We also believe that the market, which is getting close to putting a 100 bps Fed rate hike in prices at the next two FOMC meetings, may favor the dollar. Thus, investors may find the current levels relatively attractive for the recovery of some USD longs, mainly against European currencies," they noted. The EUR/USD pair took advantage of some weakening of the greenback to rise above 1.1000 on Friday, although it cannot find enough bullish support to extend the growth to 1.1100. "The combination of continuing risks associated with the conflict between Kiev and Moscow, high energy prices and divergence in the policy of the Fed and the ECB still promises the EUR/USD pair weakening rather than growth. We continue to expect the quotes to fall to 1.0800-1.0900 in the coming weeks," they said.
