Since the beginning of Russia's special operation in Ukraine, the US currency has strengthened by 3.4%.
The greenback confidently pushed competitors on Monday, enjoying demand as a safe haven asset, and it seemed that the rise to 100.00 was not far off.
However, on Tuesday, fortune turned away from dollar bulls. The USD index turned to decline amid signs of a rapprochement between the positions of Kiev and Moscow following the results of the next round of peace talks in Istanbul.
Any move towards a ceasefire or a potential peace agreement in Ukraine would be positive news for Europe, which is experiencing a significant economic blow from the conflict.
The euro has become the leader of the foreign exchange market, thanks to the assumptions that the conflict may be moving into a more localized phase, and the probability of some of the most extreme scenarios is decreasing. In recent sessions, the EUR/USD pair has gained more than 170 points. Starting Monday at 1.0985, it ended yesterday's trading at 1.1160.
The rally of risky assets led by the euro led to the fact that the USD index fell to the lowest values in three weeks in the area of 97.70 points.
Although the dollar continued to weaken against its main competitors on Wednesday, and the USD index sank by more than 0.5%, the pace of short positions on the US currency slowed down as the headlines forced investors to be cautious.
Kremlin spokesman Dmitry Peskov said that nothing had happened in the negotiations with Kiev that could be regarded as a breakthrough, adding that much more needs to be done for this.
Meanwhile, the fighting in Ukraine continued, and the diplomats of the United States and the European Union held the first high-level meeting on Wednesday, which was dedicated to Russia.
It is reported that the meeting was held in Washington. On the American side, Deputy Secretary of State Victoria Nuland took part in it, and the EU was represented by Deputy Secretary General for Political Affairs of the European External Relations Service Enrique Mora.
"The parties welcomed the coordination between the US and the EU in the implementation of export control measures in response to Russia's actions and discussed the continuation of close cooperation in coordination with the G7 to ensure strict implementation of these measures. They also discussed new steps to further isolate Russia from the US and EU economies, as well as the international financial system," the final communique says.
The preservation of geopolitical tensions allowed the defensive greenback to stay afloat.
Some support for the US currency was provided by data published the day before by the ADP Research Institute. They showed that in March, American companies hired another 455,000 people.
These data are a leading indicator of the monthly official employment report, which will be released on Friday. The strong numbers will add to the Federal Reserve's confidence that it will be able to continue raising interest rates to combat rising inflation. This will play into the hands of the dollar.
"The dollar remains cheaper against most of the currencies of the G10 countries in the short term, if we take into account short-term rate differentials - the usual key factor in the movement of exchange rates. This retains the potential to strengthen the greenback," ING analysts noted.
The USD index may test even lower levels if the de-escalation of tensions in Ukraine continues, but a steady drop below 97.00 is unlikely to develop, Westpac strategists believe.
"Unsurpassed yields in the United States and a fiercely hawkish Fed should provide a steady tailwind for the US currency. The USD index may rise to 100 and higher in the coming weeks," they said.
Thus, the future prospects of the dollar largely depend not only on the development of events in Ukraine, but also on the degree to which the US central bank will tighten policy, and how it will correlate with the policies of other leading central banks, including the European Central Bank.
After an impressive growth, the EUR/USD pair entered consolidation mode in the second half of yesterday.
The German inflation data published the day before for March somewhat cooled the ardor of the euro bulls.
According to Destatis, this month consumer prices in the country accelerated to 7.3% from 5.1% recorded in February. The indicator became a record in the entire history of observations.
Economists say that the problem of inflation is not unique to Germany. Spain, for example, earlier on Wednesday reported an inflation rate of just under 10% in March.
Data on the consumer price index in the eurozone as a whole will be presented on Friday. According to forecasts, inflation will reach new multi-year highs.
A steady rise in inflation increases the cost of living, negatively affects consumer activity, erodes the purchasing power of the euro and puts pressure on the ECB.
"The European Central Bank has no choice but to start tightening policy right now," KfW analysts believe.
Analysts from VP Bank Group agree with them.
"If the European monetary authorities continue to vegetate, there is a risk that their further reaction will be even more drastic. The ECB's mantra that inflation rates will return to the ECB's 2% target from next year is no longer working," they said.
Although the acceleration of inflation in the eurozone is keeping central bankers in Frankfurt am Main awake, they believe that a hasty tightening of policy could push the region's economy into recession, which will further harm consumers.
To reduce this risk, ECB President Christine Lagarde promised to move only in small steps, without taking on long-term commitments.
"Gradualism means that we will proceed cautiously and adjust our policy as we receive feedback on our actions," she said.
Lagarde acknowledged that the eurozone is facing slower growth and higher inflation, but still believes that it can avoid stagflation.
At the same time, the ECB President called on EU governments and investors to provide financing to increase the sustainability of the European economy.
"Europe needs to develop a plan to ensure that the necessary investments arrive as quickly and smoothly as possible, while public and private investments should reinforce each other," she said.
The ECB has not yet made clear commitments to combat inflation. Until this happens, the euro will remain under pressure, Commerzbank believes.
"The Fed has already made it very clear that it will not do nothing, but will take measures against inflation in an aggressive and rapid manner. The ECB has yet to make such a commitment. If we get it, the euro will most likely win. The sooner this happens, the better for the euro," the bank's strategists said.
"Until the risk of an energy crisis and significant economic consequences of the military conflict in Ukraine is eliminated, the ECB is likely to hesitate, hesitating to make a clear commitment. As a result, it will take some time before the euro can strengthen on a sustainable basis," they added.
The EUR/USD pair lost its bullish momentum on Thursday and moved into negative territory. Touching the highest level in almost a month at 1.1180, it sank below 1.1100, losing about 0.5%.
The mid-March peak of 1.1140 is now the first resistance line, followed by a new peak of 1.1180, followed by 1.1230 and 1.1250.
On the other hand, the nearest support is at 1.1085, and further at 1.1070 and 1.1050.
Hopes for a further de-escalation of the Russian-Ukrainian crisis faded as quickly as they appeared.
Recent headlines related to this conflict suggest that the parties are not as close to finding a diplomatic solution as investors had assumed.
The deterioration of market sentiment put pressure on the EUR/USD pair and allowed the defensive greenback to shrug off its recent weakness.
The dollar has recovered steadily, returning above 98.00, amid heightened expectations that the Fed will raise interest rates by 50 basis points at the next two meetings to combat high inflation.
In favor of such a step, data published today on the basic PCE price index in the United States indicate. The indicator in February accelerated to 5.4% year-on-year from 5.2% recorded in the previous month.
The expansion of the rate differential should still support the dollar against the euro, ABN Amro believes.
"Now we expect investor sentiment to be cautious, not negative. Therefore, we believe that the dollar has less room for growth against the euro. Nevertheless, the widening rate differential should still support USD against EUR," the bank's specialists noted.
"The eurozone economy will continue to feel the impact of the conflict in Ukraine more strongly than the US economy. Thus, we are more positive about the US dollar than the euro. But we see less potential for EUR/USD decline than the parity that we indicated a few weeks ago. Our new forecast for the end of the year for the pair is 1.0500," they added.
