Experts positively assess the potential of the US currency. At the same time, the relative lull in the dynamics of USD worries the markets. Growing concerns are reinforced by geopolitical instability and the expectation of an early rise in the Fed's interest rate.
The escalation of the geopolitical situation at the end of last week put significant pressure on the greenback and the EUR/USD pair, which collapsed from a high near 1.1375 to 1.1320, but then recovered. Currently, the pair runs in a wide range of 1.1300-1.1400, which will remain in the near future.
The new week began for the dollar with a slight decline against the euro. The reason is a small respite in the difficult geopolitical situation around Ukraine. On the morning of Monday, February 21, the EUR/USD pair was trading at 1.1363. The European currency strengthened its position against the US one, taking advantage of the pause in the geopolitical confrontation.
Many analysts are set to increase the price of the greenback, despite the tense external background. After a month-long reduction in positions for USD growth, investors and traders set a course to increase them. Over the past week, large investment funds have raised long positions on the greenback by 5%. The continuation of this trend contributes to the further growth of the US currency.
However, in the medium and long term prospects for the USD, not everything is as rosy as it seems at first glance. The dollar has a serious rival, experts warn. This is not the euro, but the British currency, which can compete with the US one.
Optimism about the pound is promoted by its slow but steady growth compared to the volatility of the greenback and the euro. Against the background of the upcoming tightening of the PREP by the leading central banks, the Federal Reserve and the European Central Bank, the Bank of England found itself in a more advantageous situation. The British central bank took care of the normalization of monetary policy in advance, increasing the interest rate twice: the first time - from 0.125% to 0.25%, and two weeks ago - from 0.25% to 0.5%. According to analysts, this has not happened since 2004.
Experts believe that against the background of galloping inflation in the United Kingdom, the central bank will increase the rate again. To this decision, the Bank of England is pushing another round of inflation (up to 5.5%), which has not been recorded since 1992. As a result, the pound, with the monetary support of the central bank, can compete with the dollar.
Experts consider the upcoming increase in the Fed's interest rate to be another factor of pressure on the greenback. Many analysts are arguing about the tightening of the PREP by the Federal Reserve, weighing the pros and cons for the dollar. At the same time, analysts find it difficult to give an unambiguous assessment of what is happening. They are afraid of the so-called "feedback loop" that keeps inflation at a high level. According to JPMorgan experts, a similar "loop" in the economy is formed between strong growth, price pressure and household actions. The effect of the "feedback loop" generates a colossal financial burden, characteristic of off-scale inflation. Currently, a similar situation is observed.
Against this background, the Fed is able to raise the interest rate nine times, according to JPMorgan. Currency strategists consider this a necessary measure to curb inflation in the US: "This year, the Fed will raise the rate by 25 basis points at each of the nine meetings." It is expected that such steps will support the greenback, which will retain its status as a global protective asset. The power of the US currency allows it to stay afloat and strengthen its position in times of crisis.
