The US currency continues to squeeze its main competitors, benefiting from concerns that the Federal Reserve is ready to abandon monetary support at a time when headwinds for the global economy are increasing.
Negative sentiment still prevails in the markets, and it seems that the bears are advancing on all fronts.
In addition to the prospect of tightening monetary policy in the US, investors are concerned about the inability of US lawmakers to agree on raising the debt limit, as well as a sharp rise in energy prices, which threatens to undermine the economic recovery in both the eurozone and China.
The day before, the cost of gas in Europe for the first time in history reached $1,000 per thousand cubic meters, while the price of Brent crude oil updated the high of almost three years ago, exceeding the mark of $80 per barrel. As for coal, it is now as expensive as it was twelve years ago.
After the unrestrained optimism of the beginning of the year, the markets are now entering the twilight zone, as the year 2021 is nearing its end, analysts at Deutsche Bank say.
They have improved the forecast for the dollar and recommend betting against the euro.
"Stable stagflationary dynamics - lower global growth, hawkish Fed - leaves no room for a downtrend in USD," analysts said.
The greenback is unlikely to drop significantly, strategists at Rabobank say.
"This is difficult to achieve in an environment dominated by concerns about both higher energy prices and higher US interest rates. Our six-month EUR/USD target of 1.1600 looks set to be hit earlier than we expected," they said.
On Tuesday, the dollar strengthened significantly against all major currencies against the background of rising government bond yields and a sharp drop in shares.
The day before, the S&P 500 index lost more than 2% and dipped to 4352 points after touching the 50-day moving average near 4450 points. This short-term trend line has moved from support to resistance, which indicates a shift in sentiment from market participants from buying on downturns to selling on rising.
By all appearances, investors have already begun adjusting the composition of their portfolios in order to prepare for the gradual rollback of the Fed's soft monetary policy.
In case of strengthening of the downward momentum, the S&P 500 index may show a deeper drawdown in the area of the 200-day moving average, which is now passing around 4145 points.
The catalyst for yesterday's sell-off in the US stock market was concerns that the Fed, reacting to a surge in inflation in the US due to rising energy prices, may begin to tighten monetary policy earlier than predicted.
The pressure on stock indexes was also exerted by the yield of long-term US government bonds, which rose on Tuesday for the fourth consecutive trading session.
The day before, the indicator for 10-year treasuries jumped to 1.56%.
Some experts say that the increase in the profitability of US government securities is due to economic optimism, but it is hard to believe, because consumer confidence is falling, energy prices are rising, supply chains are breaking down, and winter is on the horizon.
According to the Conference Board, in September, the consumer confidence index in the United States fell for the third consecutive month, to 109.3 points from 115.2 points recorded in August.
Meanwhile, the rise in the price of natural gas and oil not only directly hits consumers' wallets, but also accelerates inflation in general.
Yesterday, Fed Chairman Jerome Powell said that inflation turned out to be broader, has a structural nature and causes more concern than at the beginning of this year. He also noted that the situation with interruptions in supply chains (for example, the shortage of microelectronics) has not only not improved, but even worsened.
The president of the St. Louis Federal Reserve, James Bullard, in turn, said that he expects further inflation growth and allows two increases in the key interest rate in 2022.
It is obvious that inflation, which has jumped noticeably this year, requires a reduction in the amount of monetary stimulus from the Fed. This is positive news for the greenback and a negative moment for stocks and risky currencies.
On Tuesday, the EUR/USD pair sank by more than 0.1% to 1.1682. At the same time, the USD index rose to 93.82 points, reaching the highest level in more than ten months.
The dollar is strengthening on the prospects of tightening monetary policy in the United States, ING analysts say.
"The current market environment seems to offer the perfect combination of factors for the dollar. Concerns about inflation and higher yields of treasuries affected global stock markets on Tuesday," they said.
Behind the recent sell-off in the US debt market is a rethinking of the Fed's policy, including the possibility of a much earlier than expected increase in interest rates, according to Bloomberg analysts.
In addition, the pressure on long-term bonds is increasing, since American lawmakers cannot agree on raising the debt ceiling in any way.
Republican senators on Tuesday again blocked the Democratic Party's proposal to prevent a US default on the national debt.
Thus, American lawmakers have less and less time to prevent a possible "shutdown" by midnight on Thursday, when the current fiscal year ends in the country.
Yesterday's interconnected movement of the markets, in which stocks fell, the yields of treasuries and the dollar grew, weakened somewhat today.
Key Wall Street indices returned to the green zone, while the yield on 10-year US bonds sank from 1.56% to 1.50%.
Nevertheless, the stock market still looks vulnerable, as the yield of treasuries is near three-month peaks, oil quotes are still ready to overcome the $90 per barrel mark, problems in supply chains are not easing, and the Fed is gradually moving towards an exit from a soft monetary policy.
Powell said the day before that the central bank had fulfilled almost all the criteria to start curtailing stimulus measures.
Large-scale asset purchases by the US central bank helped stabilize the markets at the beginning of the pandemic, but the time will soon come to start reducing them, Philadelphia Fed President Patrick Harker said today.
"I am in the camp that believes that the time will soon come to start slowly and methodically reducing our monthly purchases of treasury bills and mortgage-backed securities by $120 billion," he said.
Despite the decline in US government bond yields, the dollar continued to rise on Wednesday, receiving support from expectations about tightening monetary conditions in the United States.
"We believe that the strengthening of the dollar will continue until the end of the year. And this is only because of the prospects of tightening the Fed's monetary policy," Commonwealth Bank of Australia strategists said, adding that an increase in interest rates in the United States could occur by the end of 2022.
The greenback shows a fighting spirit, especially against the background of the current dynamics of the EUR/USD pair, which broke through the important support at 1.1664. A breakthrough of the 1.1600 level could move the USD index into a higher trading range, analysts at TD Securities believe.
"The bias of the main currency pair remains downward, and the key support is at 1.1600. Its breakdown will be a turning point for players who adhere to the "momentum trading" style. A breakthrough of the 1.1600 level by the EUR/USD pair may clear the way for the USD index to move to a higher trading range of 94.00-96.00," they said.
