Stock market week ahead: War in Ukraine sparked dollar rush
One of the reasons for its sharp rise: investors have decided to no longer hold euros given the proximity of Europe to the conflict. They ditched the bloc’s common currency and bought dollars instead.
“European markets are just not attractive right now simply because of their geographic exposure to Ukraine and Russia,” ING strategist Francesco Pesole told me.
Natural gas prices in Europe hit record highs last week on worries about what will happen to Russia’s energy exports. The United States, which is itself a major energy producer, is penalized by higher costs, but to a lesser extent.
The US economy also appears to be in good shape despite high inflation: 678,000 jobs were created in February, according to data released Friday, shocking forecasts.
Additionally, the dollar received a boost after Federal Reserve Chairman Jerome Powell said the central bank intended 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 European policymakers are forced to delay their own hikes any longer.
One more thing: in times of crisis, there is no currency that investors and policymakers prefer to hold. The dollar represented 60% of world reserves in 2021.
“Markets and central banks want to hold the dollar because it’s a very liquid currency. It’s very negotiable,” Pesole said. “It’s backed by a very strong and solid economy.”
A stronger dollar can hurt the profits of companies that make money overseas, but a bigger concern is how the dollar’s rise will affect emerging economies, which often have to pay off their debts in dollars.
There has already been some concern over whether Russia’s economic implosion will also cause investors to abandon riskier markets like Brazil, Turkey or Mexico. The rising dollar could add pressure.
Watch this space: There have been talks about whether Russia’s war in Ukraine could shake the dominance of the dollar, bolstering Moscow’s resolve — as well as Beijing’s — to develop alternative financing mechanisms that will make Western sanctions less effective over time. However, the end of King Dollar has already been announced several times.
“There is no real indication that the dollar’s dominance is diminishing,” Pesole said. “It’s a [storyline] it can only be for the very long term.”
Russia’s war has already transformed the global economy
Fast rewind: Russia’s $1.5 trillion economy is the 11th largest in the world, according to World Bank data. A month ago, the country was doing a bumper energy trade, exporting millions of barrels of crude a day with the help of big oil companies. Western brands were doing good business in Russia, and investors were lending to its businesses.
Now, a deluge of sanctions has left Russia’s biggest banks radioactive, traders are shunning barrels of Urals crude, and Western companies are fleeing the country or closing up shop, my CNN Business colleague Charles Riley reports. Russian stocks were excluded from global indices and trading in some Russian companies was halted in New York and London.
Big Picture: Russian President Vladimir Putin’s invasion of Ukraine prompted an unprecedented response from the United States, United Kingdom, European Union, Canada, Japan, Australia and other countries. Even Switzerland, famous for its neutrality and banking secrecy, has pledged to impose sanctions on Russia.
The sanctions prevented Russia’s two largest banks, Sberbank and VTB, from trading in US dollars. The West has also removed many 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 stop Russia’s central bank from selling dollars and other foreign currencies to defend the ruble and its economy. In total, nearly $1 trillion in Russian assets have now been frozen by sanctions, according to French Finance Minister Bruno Le Maire.
“Western democracies have surprised many by pursuing a strategy of putting intense economic pressure on Russia by effectively cutting it off from global financial markets,” Oliver Allen, market economist at Capital Economics, said in a research note.
“If Russia continues on its current course, it is quite easy to see how the latest sanctions could be only the first steps in a serious and lasting severance of Russia’s financial and economic ties with the rest of the world.”
Friday: University of Michigan Consumer Sentiment