Currently, the US currency demonstrates two opposite functions – a protective asset and a means of threat in geopolitical conflicts. The use of the US dollar in the latter is fraught with the loss of its dominance in the global financial market.
Experts said that America is taking a big risk by turning its national currency into an instrument of external aggression. Earlier, Washington made it clear that the US dollar is a powerful tool of foreign policy and financial control. Such manipulation of the USD's power may push other countries to seek alternative financial means. Experts are confident that the implementation of such a scenario will cause irreparable damage to the global economy. By turning this currency into a weapon, Washington will weaken its role as the "core of the global financial system," the Atlantic Council report emphasizes.
According to economists, the use of the greenback as a tool of pressure threatens its global dominance. The Atlantic Council study notes that its use as a foreign policy weapon threatens its status as the world's reserve currency. But in most cases, it is used for peaceful purposes, that is, as a protective asset, which investors seek to secure their savings. According to experts, this status justifies the market's expectations regarding US currency.
The current situation in the world markets contributes to the US dollar's price growth. On Tuesday, it noticeably increased amid rising yields on US Treasury bonds and continued the next day. On Tuesday evening, the EUR/USD pair fell by 0.3% to the level of 1.1409. The situation improved the next day, but the pair is far from stable growth. On Wednesday morning, the EUR/USD pair was trading in the range of 1.1426-1.1427, trying to develop an upward trend. According to analysts, it may rise to the level of 1.1500 and above in the upcoming days.
Many experts believe that the high yield factor is losing relevance. It was considered the main driver of USD growth before, but the situation has now changed. At the moment, the primary factor is macro statistics data, which forces the markets to revise previous forecasts. The exchange rate of the European currency against the US dollar is still determined by the dynamics of the yield spread of 2-year treasuries and German government securities. For several weeks, the profitability of both assets showed a significant increase, but the "hawkish" reversal in ECB policy led to a narrowing of spreads between them.
On Tuesday evening, the price of the US dollar increased against the euro on the wave of the prolonged growth in the yield of US Treasury bonds before the new US inflation data, which will be released on Thursday. The positive statistics on the US labor market in January played an important role in the growth of the US dollar. It provoked a reassessment of market expectations for central bank rates. Currently, the market is focused on a possible 5.5 rate hike (by 0.25%) until the end of 2022.
Most likely, the release of US inflation data this Thursday will also end with a revision of previous expectations. According to preliminary estimates, the US consumer inflation rate for January will reach a new high over the past 40 years and will be 7.3% year on year. It can be recalled that this figure was 7% year-on-year last December 2021.
Last month, experts recorded noticeable volatility in the financial markets. Against this background, many investors overestimated the prospects for monetary policy in the US and Europe. This triggered a sharp rise in government bond yields in several countries.
Previously, the increase in yields supported the US dollar, but now, investors believe that the tightening of the Fed's monetary policy will slow down economic growth. There is a decrease in interest in long-term investments in the US dollar across the entire spectrum of the market, which is facilitated by the current political and economic instability. Nevertheless, the yield of 10-year treasuries increased by 2%, contributing to increased demand for the US dollar.
As for the Euro currency, analysts believe that the strengthening of the US dollar will not bring any special preferences. The fact that markets are pricing in a rate hike in March 2022 adds pressure on the EUR/USD pair. At the same time, the Fed's "hawkish" attitude does not give an advantage to the euro. Currency strategists at Commerzbank are sure that the euro's price is unlikely to rise much against the US dollar. The specialists do not see any reason for optimism regarding the further growth of the euro in pair with the dollar, but they are ready for any changes in the EUR/USD pair.