One reason for its rapid growth: Investors decided they no longer wanted to hold the euro, given its proximity to Europe. They abandoned the common currency of the block and bought dollars instead.
ING strategist Francesco Pesol told me, “European markets are not attractive at the moment, simply because of the geographic exposure of Ukraine and Russia.”
Natural gas prices in Europe hit record highs last week on concerns about what would happen to energy exports from Russia. The United States, itself a major producer of energy, continues to be troubled by high costs, but to a lesser extent.
The US economy also looks healthy despite high inflation: 678,000 jobs were added in February, data released Friday showed, beating forecasts.
Furthermore, Federal Reserve Chairman Jerome Powell said the dollar got a boost after the central bank aimed to start raising interest rates later this month, even though the situation in Ukraine has clouded the outlook. Higher interest rates should help attract capital from abroad, especially if policymakers in Europe are forced to delay their own hikes longer.
One more thing: In times of crisis, there is no currency investor and policy-makers prefer to hold onto it. The dollar accounted for 60% of global reserves in 2021.
“Markets and central banks want to hold onto the dollar because it is a very liquid currency. It is highly tradable,” Pesol said. “It’s backed by a very strong and solid economy.”
A stronger dollar could hurt the profits of companies that make money overseas, but a bigger concern is how the dollar’s climb will affect emerging economies, which often have to pay off their debt in dollars.
There is already some concern about whether Russia’s economic impact will also lead to investors leaving riskier markets such as Brazil, Turkey or Mexico. A rise in the dollar could add to the pressure.
Watch this space: There has been some chatter about whether Russia’s war in Ukraine could shake the dollar’s dominance, bolstering Moscow’s resolve – along with Beijing – to develop alternative financing mechanisms that will help protect against Western sanctions. will make it less effective over time. Yet the end of the king dollar has been said many times before.
“There’s really no sign that dollar dominance is shrinking,” Pesol said. “this is a [storyline] This can only happen for a very long period of time.”
Russia’s war has already transformed the global economy
Quick rewind: According to World Bank data, Russia’s $1.5 trillion economy is the 11th largest economy in the world. A month ago, the country was doing a bumper energy trade, exporting millions of barrels of crude a day with the help of major oil companies. Western brands were booming in Russia and investors were lending to its companies.
Now, a barrage of sanctions has made Russia’s biggest banks radioactive, merchants off barrels of Urals crude, and Western companies are fleeing the country or closing shop, says my CNN business colleague Charles Riley. Report. Russian stocks have been pulled out of global indices, and trading in some Russian companies has been halted in New York and London.
Big picture: Russian President Vladimir Putin’s invasion of Ukraine has received an unprecedented response from the United States, the United Kingdom, the European Union, Canada, Japan, Australia and other countries. Even Switzerland, known for its neutrality and banking secrecy, has promised to impose sanctions on Russia.
The sanctions have cut Russia’s two biggest banks, Sberbank and VTB, from transacting in US dollars. The West has also removed several Russian banks – including VTB – from SWIFT, a global messaging service that connects financial institutions and facilitates fast and secure payments.
The coalition is trying to prevent Russia’s central bank from selling dollars and other foreign currencies to protect the ruble and its economy. Overall, nearly $1 trillion worth of Russian assets are now confiscated by sanctions, according to French Finance Minister Bruno Le Maire.
“Western democracies have surprised many by adopting a strategy to exert intense economic pressure on Russia through effectively cutting off global financial markets,” Oliver Allen, market economist at Capital Economics, said in a research note.
“If Russia continues on its current path, it is quite easy to see how the latest sanctions could be the first step in seriously and permanently severing Russia’s financial and economic ties with the rest of the world.”
next
Friday: University of Michigan Consumer Sentiment