The sparks of the geopolitical conflict simmering around Ukraine have scattered across the global market and burned the euro. At the same time, the US currency got a chance to gain a foothold in the role of a reliable asset of a "safe haven", into which investors once again "dived" into.
Many European currencies, in particular the Swedish krona, the euro, the Hungarian forint and the Polish zloty, could not withstand the geopolitical tension and sank sharply. Investors rushed to safe currencies, primarily the US, as well as the Swiss franc and the yen. In the course of large-scale risk avoidance and the search for protective assets, the greenback gained 0.9%. According to analysts, risk aversion will dominate the market in the near future. This contributes to the further strengthening of the USD, as well as other safe havens – the yen and the Swiss franc.
The massive "escape" of investors in the dollar was provoked by the intensity of the geopolitical conflict associated with the Ukrainian military operation. Market participants fear negative economic consequences and a significant tightening of sanctions rhetoric against Russian assets. Against this background, currency strategists predict a "well-coordinated movement in USD", which will continue.
The current situation has tripped up the euro, which has fallen under large-scale sales amid risk aversion. On Thursday, the EUR/USD pair was near 1.1250, but then it sank significantly. In the near future, the pair may feel bearish pressure if geopolitical tensions persist.
The euro tried to recover at the end of this week, but acted with varying success. The single currency hardly holds on to the positions it has won. A sharp geopolitical shift provoked the collapse of the EUR/USD pair from the level of 1.1300 to a new low of 1.1106, recorded in May 2020. Later, the pair slightly balanced its dynamics, rising to 1.1200. On the morning of Friday, February 25, the EUR/USD pair was trading near 1.1221, trying to get out of the downward spiral.
An additional pressure factor for the euro may be an increase in energy prices. The implementation of such a scenario will send the EUR/USD pair to the critical level of 1.1100, Danske Bank believes. An increase in the cost of energy carriers is possible in the event of a decrease in the geopolitical intensity, and this is unlikely, the bank notes.
Risk aversion, which prevails in financial markets, gives the dollar a head start. As for the European currency, it seeks to adapt to the new reality and avoid prolonged subsidence. These attempts pass with varying success. According to experts, the fair exchange rate of the euro is 1.2000. Reaching this mark in the EUR/USD pair is possible after the current US government bond placement cycle. Analysts do not rule out EUR growth after the ECB meeting scheduled for March 10.
Geopolitical turmoil has dealt a significant blow to risk appetites, but key currencies have proved resilient. In the short-term planning horizon, experts expect the recovery trend to consolidate.