US dollar maintains its momentum as the rush to safety intensifies
The US dollar continued its relentless rally as demand for safe havens jumped. The closely-watched dollar index soared to the highest level since 2020 as most currencies crashed.
The biggest concern among investors is that the Federal Reserve is committed to continuing its aggressive monetary policy. Jerome Powell is expected to deliver a series of 0.50% rate hikes even as data shows that the economy was slowing down.
On Wednesday, data by the US government showed that the economy contracted for the first time since the pandemic started. Additional data showed that pending home sales and retail sales also continued to drop.
The Fed is now mostly focused on fighting inflation. Data published on Friday showed that the headline PCE rose by 6.6% in March while core PCE rose to 5.2%. These are some of the highest levels in more than 40 years.
The main concern is that the Fed’s ability to reign in on inflation will be a bit difficult. For one, the current inflation has been caused by supply chain disruptions and the ongoing crisis in Ukraine.
The dollar index has also soared because of the ongoing risks that Russia will stop supplying natural gas to European countries. The euro is the biggest component of the US dollar index.
Another reason is that the Bank of Japan has maintained a significantly dovish tone recently. In its decision on Thursday, the bank decided to leave rates and quantitative easing intact. In most periods, the BOJ prefers a weak yen.
The US dollar also surged against the Chinese yuan and the renminbi. The Chinese yuan crashed to the lowest level in months after the government committed to boosting infrastructure spending.
