The greenback ended last week on a positive note, just above 99.00 points.
On Friday, the greenback continued to strengthen against the euro, thanks to investors' continuing fears for the fate of the global economy in connection with the introduction of new sanctions against Moscow by Washington.
The EUR/USD pair sank by more than 0.6% and closed in the red zone around 1.0910.
Key Wall Street indices also ended the past week with negative dynamics.
Having failed to hold the positions gained initially, the S&P 500 decreased by 1.3% to 4,204.31 points. The index fell by 2.9% for the second week in a row.
The optimism of investors associated with the statement of Russian President Vladimir Putin about the presence of positive developments in negotiations with Ukraine, which supported the market at the beginning of trading, quickly faded.
On Friday, the head of the White House Joe Biden said that the United States refuses to import alcoholic beverages, seafood and diamonds from Russia.
In addition, he signed a decree according to which new investments in any sector of the Russian economy are now prohibited for US residents, depending on the decision of the US Ministry of Finance.
Statistical data on the United States also added negativity, which showed that the consumer confidence index in the country from the University of Michigan fell to 59.7 points in March compared to 62.8 points a month earlier. The indicator value has become the lowest since November 2011. This signals signs of a slowdown in American consumer activity and threatens not to justify investors' forecasts regarding company profits.
"The main risk to the profits of S&P 500 companies is the rise in commodity prices and the resulting weak consumer confidence and low economic growth," said strategists at Goldman Sachs.
The bank's new forecast for the S&P 500 index suggests that the indicator will end the year with a slight decline.
At the same time, Goldman Sachs does not exclude the deterioration of the situation, estimating at 35% the chances of a recession in the United States due to rising oil prices and other negative consequences of the conflict over Ukraine.
The risk of recession is partly embedded in the current stock prices, the bank's experts say.
"In the case of a negative scenario, we expect a decline in company profits and a 15% drop in the S&P 500, up to 3,600 points by the end of the year," they said.
"Everyone is on edge right now. The market is ready to go up in case of de-escalation of the Ukrainian crisis, but it may go down if the situation worsens," Neuberger Berman Group reported.
How will the confrontation between Moscow and Kiev end? This question worries many, and there is no clear answer to it.
There are four scenarios.
1) Ceasefire and "frozen" conflict
Russian and Ukrainian officials have been in touch almost since Moscow ordered its troops to enter the neighboring state. Although the negotiations have not yet yielded results, the fact that the dialogue continues opens the way to a cessation of hostilities. This will be seen as the first step towards a long-term settlement, but it may turn into a "frozen" conflict, similar to what has been observed in the Donbas over the past eight years.
Occasional skirmishes and ongoing Western sanctions against Moscow would turn the initial recovery in the markets into a gradual decline.
The threat of an outbreak of a new full-scale war will contribute to an increase in oil and gas prices. The greenback, as a rule, wins in times of uncertainty, and the likely tightening of the Federal Reserve's monetary policy associated with higher energy costs, as well as domestic price pressure, will further strengthen the US currency, while stocks will suffer even more.
2) Conclusion of the transaction
Investors would breathe a sigh of relief if the military actions in Ukraine ended in a long-term deal.
Kiev's commitment to refrain from joining NATO when joining the EU and the withdrawal of Russian troops from most of Ukraine's territory could be the basis for a deal.
In such a scenario, stocks will soar and oil and gas prices will fall as Russia returns to world markets with some potential.
The dollar will initially collapse amid a sell-off of defensive assets, but will later rise as the Fed remains at the forefront of monetary tightening. It is important to remember that core inflation in the US is higher than in many other countries, and this is what matters to the central bank.
3) Capitulation of Ukraine
If Kiev had raised the white flag under the onslaught of Moscow's military might, such a scenario would have kept Russia isolated, and the West could have imposed additional sanctions on imports of goods from the country.
This would not only push oil and gas prices to further rise, but would also lead to a sharp increase in food prices, which would cause a recession in many countries, a potential coup that would force the Fed to pursue a softer policy.
In this case, the dollar will fall, because a complete surrender will provide more confidence than a cease-fire, which can be violated at any moment.
Such confidence – in an isolated but larger Russia - would ultimately be beneficial for US stocks, because the United States economy is less dependent on Russia than the European economy.
4) NATO gets involved in the conflict
If the West decides to act, the conflict will expand dramatically, which would provoke a massive collapse in stocks and possibly lead to a pause in trading. At the same time, the protective dollar will be in even greater demand.
At first, oil prices will rise, but oil-producing countries can increase production, while rising prices for other goods and declining consumer confidence will lead to the destruction of demand, which will eventually lead to a drop in prices.
It is difficult to say who would ultimately prevail in such a war, but victory would be a devastating price for the whole world.
The possible consequences for the markets complicate the work of major central banks, including the Fed and the ECB, as they seek to support slowing economic growth amid rising inflation, a sharp spike in energy prices and external shocks.
Since the cessation of hostilities in Ukraine is still a distant prospect, the growth of the eurozone economy is likely to slow down sharply, which may force the European Central Bank to switch from inflation back to growth and the need for labor.
But at the moment, the hawks are winning in the ECB Governing Council.
Following the results of the March meeting, the central bank made it clear that it is more focused on high inflation than on slowing economic growth. The bank will wind down its bond-buying program by September or even earlier, abandoning previous statements that purchases would continue in October or later. This move would put an end to the ECB's most important stimulus tool, which has been in operation for most of the past seven years.
"Perhaps the ECB will regret this decision," PGIM Fixed Income analysts believe.
The eurozone economy began to slow down even before Russia brought its troops into Ukraine. Perhaps the conflict will turn into a stagflationary shock for Europe, which borders Russia and has close trade ties with this country, including being heavily dependent on Russian energy resources.
Moreover, the conflict in Ukraine raises the risk of a third recession in the eurozone in two years. This could lead to export restrictions, disruptions to already scarce supplies and an increase in energy and commodity prices for households and the region's manufacturing sector.
The eurozone is a major importer of oil and natural gas, which means that a sharp increase in oil and gas prices has become a kind of tax on households and businesses. Because of this, the large trade surplus of the eurozone has recently been replaced by a deficit, economists at the Institute of International Finance say.
Analysts at Goldman Sachs expect that production volumes in the eurozone will actually decrease in the second quarter, citing the proximity of the region to Ukraine.
At the same time, interruptions in the supply of key goods will disproportionately hit the eurozone economy and delay the tightening of ECB policy, according to ABN Amro strategists, who now have a baseline scenario for the EUR/USD pair to fall to parity or even lower for the first time in about two decades.
The main currency pair jumped to weekly highs around 1.1120 on Thursday, but quickly abandoned the points gained, negating the growth that began after the announcement of the ECB's verdict on monetary policy.
The central bank said it would wind down a large-scale bond-buying program earlier than expected and lay the groundwork for raising interest rates later this year.
At the same time, the ECB published new economic forecasts, in which there was nothing positive for the euro.
The Financial Institute lowered the forecast of eurozone GDP growth in 2022 from 4.2% to 3.7%, while the inflation estimate for the current year was raised from 3.2% to 5.1%.
By stopping asset purchases earlier than expected, the ECB risks taking a dangerous step of tightening in the face of slowing economic growth.
The Fed also faced an extremely difficult task.
"The central bank will have to literally balance between inflation and pushing us into recession," experts at PGIM Quantitative Solutions said.
When the only cause for concern was the COVID-19 pandemic, Fed officials rallied around the view that they could tame inflation with a moderate increase in interest rates, while the economy and labor market were thriving.
However, the Russian-Ukrainian conflict has overlapped on top of the health crisis, and when US central bank policymakers meet later this week, they will have to decide how much damage has been done to these rosy prospects, and whether their hopes for a soft landing of the economy have diminished or collapsed altogether.
Fed Chairman Jerome Powell has recently been using less specific terms, such as "agile," for policies that are expected to include sustained rate hikes this year, but which may have to be either accelerated or slowed down in response to rapidly changing events and conditions.
Speaking to Congress earlier this month, Powell made it clear that the central bank's attention is focused on inflation and that he is ready to raise interest rates and increase them by half a percent if price growth does not slow down.
But Powell also acknowledged that the world has become more complex, and it may take time to understand it.
"The Russian-Ukrainian conflict is changing the rules of the game and may be with us for a very long time. The main events seem to be still ahead, and we do not know what the real impact on the US economy will be. We also do not know whether these consequences will be long enough or not," the Fed chairman said at a hearing before the House Financial Services Committee on March 2.
In the coming days, there will be a Fed meeting, following which the central bank will make decisions on the further course of monetary policy.
There is no doubt now that the FOMC will start raising rates. However, everyone wants to know what the Fed will do next?
The Fed is almost certain to raise its benchmark interest rate by a quarter of a percentage point at the end of its two-day meeting on Wednesday. More important will be forecasts showing how much, according to politicians, it will be necessary to raise rates this year and in 2023-2024.
If the new forecasts show that the target federal funds rate will exceed 2.50% in the coming years, it will signal that the majority of FOMC members are so concerned about inflation that they do not care about the risk of recession in order to reduce it quickly. This would be a very hawkish development and would support the dollar.
Capital Economics analysts expect the Fed to raise the base rate by 25 basis points and continue its commitment to an aggressive tightening cycle, which may resume the rally of the US currency.
On Monday, the USD index rose to 99.30 points during the Asian session, approaching a 22-month high, but then was forced to return to the zone below 99.00 amid renewed hopes for a diplomatic solution to the conflict in Ukraine.
The head of the office of the President of Ukraine, Mikhail Podolyak, said on Sunday that Russia was conducting constructive negotiations, adding that the parties could reach results within a few days. Russian delegate Leonid Slutsky, in turn, noted that significant progress has been made in the negotiations.
Nevertheless, the fighting in Ukraine continues.
A Kremlin spokesman said today that all of Russia's plans in Ukraine will be implemented in full and on schedule.
"The special operation is developing according to plan, it will be completed on time and in full," said Dmitry Peskov, the press secretary of the president of Russia. At the same time, he clarified that the deadline for its completion is not announced.
If there is no significant de-escalation of the conflict in Ukraine, the dollar should remain stronger, MUFG Bank believes.
The current bullish sentiment of the US currency is still supported by the 6-month support line, which now runs near 95.80, while the longer-term outlook for USD remains positive as long as it stays above the 200-day moving average at 94.35.
Tracking some improvement in risk sentiment, the EUR/USD pair bounced back from the 1.0900 level on Monday and recouped the bulk of Friday's losses. However, as noted in Scotiabank, the technical picture remains clearly bearish.
"The main currency pair will need to at least test the 1.1000 level soon (after the intraday high of 1.0990), otherwise the broader downward trend will continue to put pressure on it, pushing it to retest the 1.0800 level in the coming days," the bank's strategists said.
"The 1.1050 level acts as the next resistance after 1.1000. The support below 1.0940-1.0950 is the 1.0900 area, followed by the 1.0850 zone," they added.
As for the long-term prospects, according to Nomura economists, the EUR/USD pair will decline to 1.0800 in the second quarter and will most likely recover to 1.1400 by the end of 2022.
"There are three types of risks that can lead to a depreciation of the euro against the US dollar: 1) higher energy prices in Europe, which is heavily dependent on Russian gas and oil; 2) higher food prices; 3) the cost of sanctions for European banks. Taking into account these risks, we revised our forecast for the EUR/USD pair downward to 1.0800 in Q2, but with the probability of a stronger recovery from Q3 to 1.1000, 1.1400 by the end of 2022 and 1.2000 by the end of 2023," the bank said.
Support for the euro in the future is likely to be caused by the easing of the conflict between Russia and Ukraine, the transition to more positive growth forecasts in the eurozone and increased expectations of normalization of the ECB's monetary policy, Nomura analysts believe.
They point out that negative risks for the single currency include a prolonged geopolitical crisis, which may intensify in the third quarter.
"This will lead to the fact that the EUR/USD pair will get even closer to parity around 1.0200–1.0300 if we see that new extreme energy prices will lead to the closure of European plants," Nomura noted.