The dollar’s strength has been boosted by a number of factors, including higher interest rates and worries about global economic growth. While the European Central Bank’s decision to hike rates also supported the dollar, the ECB’s resolve has also led to the euro’s rise. The dollar has also strengthened against the Japanese yen, as market players are torn between aggressive tightening of financial conditions and concerns over the consequences of the economic fallout.
Meanwhile, in the U.S., Federal Reserve Chairman Jerome Powell told Congress that a recession is “definitely possible” and that he was committed to bringing prices under control. Although the Fed’s monetary policy is intended to tame inflation, it’s important to note that raising rates could trigger an economic downturn. While monetary tightening has been a major concern for investors, Powell’s comments have weighed on the USD despite his commitment to price stability.
In the short-term, investors’ reaction to the Fed’s decision was relief that the Fed was not increasing rates aggressively. But the intermediate-to-long-term yields are nearing their highs from last year – the last time the Fed was in tightening mode. This could be a precursor to a major uptick in yields, although it’s important to note that past performance is no guarantee of future results.
The dollar’s rise has been particularly damaging for American companies with international operations. Nike and Microsoft have recently reported reduced profits as their foreign sales fell – both of which have large dollar debts. Apple and other tech giants – which generate a significant percentage of their sales outside the U.S. – are likely to feel the pinch as well. And this will exacerbate the problem for many emerging-market economies, which are increasingly reliant on energy imports.
On the other hand, the euro clawed back a bit from last week’s highs, with oil prices jumping five percent. The euro was a victim of the ECB’s slowing of tightening, and heightened fears of a recession hit investors across all markets. Traders are waiting for several key economic indicators this week to gauge whether this stimulus drive will have a positive impact on prices. The consumer price index is expected to hit a 41-year high, which will reinforce the Fed’s determination to raise interest rates. However, the Federal Reserve has warned against raising interest rates too rapidly, as a premature rate hike could tip the economy into recession.
In other news, the Fed is set to hike rates again this month. The Fed has been concerned about inflation pressures and is preparing to raise rates in June. However, it must keep credibility with the American public or risk that elevated inflation will become entrenched. The Fed’s rate hikes are expected to continue into the end of the year. Further, the Fed’s aggressive plan to increase rates could have negative effects on the dollar.
Eurozone stock markets have weakened on Monday. London’s blue-chip FTSE-100 index fell 0.7 percent, Frankfurt’s DAX dropped 1.4 percent, and Paris’ CAC-40 shed 1.1 percent. The euro fell below the symbolic $1.00 mark for the first time since December 2002, and is now at $.0998. Investors have also weighed the impact of Russia’s planned gas supply on Germany. A prolonged gas supply cut could stop much of Germany’s economic activity and send the economy into recession.