Dollar Hits 2-Year High, Euro Hit by Russian Sanctions

EUR/USD is getting closer to a one-month record low as markets fear the aftermath of the protracted Russia-Ukraine war.

The US dollar index (DXY) continued the rally that has been underway since the release of NFP data last week to hit a record high in nearly two years. When the news was written at the beginning of the European session this Wednesday (6/April), DXY was still flashy in the 99.60s range. Meanwhile, EUR/USD is getting closer to a one-month record low as markets fear the aftermath of the protracted Russo-Ukrainian war.

DXY Daily chart via TradingView

Hawkish Comments from Dovish Figures

Federal Reserve Governor Lael Brainard said he expected the combination of rising interest rates and rapid balance sheet slimming would guide US monetary policy to a "more neutral position" by the end of this year, with further monetary tightening to be implemented as needed. Brainard is known as one of the most dovish figures in the Fed, so his hawkish statements were able to strengthen the rally in bond yields and the US dollar.

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The 2Y US Treasury bond yield is currently at its highest level since January 2019, the 5Y yield has climbed to the highest since December 2018, while the 10Y yield has risen to a record high since March 2019. The US dollar exchange rate has also strengthened, especially against the yen which is weighed down by BoJ policies and the euro which is adrift in the uncertainty of war.

"Brainard's comments are the proximate cause of higher yields and a stronger dollar we're getting," said Ray Attrill, head of global FX strategy at the National Bank of Australia, "However, when we talk about the dollar, it's hard to separate it from the euro-dollar exchange rate, given the heavy (euro) weight in the (DXY) index, and the euro is being hurt by the recent talk of expanding sanctions (on Russia), which is adding to the bad news for the Eurozone economy."

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Europe Will Block Russian Gas Imports?

The latest EU proposal unveils plans to block purchases of Russian coal as well as ban Russian ships from arriving at EU ports, in retaliation for the alleged killing of civilians in Bucha by Russian troops. The plan still needs the approval of all 27 EU member states to implement, but the mere news of the proposal has sparked a market response. The UK also appealed to G7 and NATO member countries to gradually stop importing oil and gas from Russia.

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These new sanctions can worsen Russia's economic conditions, but also have the potential to backfire for the European Union, which is currently experiencing an energy crisis. EU countries that depend on Russia's energy supply - in particular Germany and Austria - continue to try to limit the scope of sanctions against Russia in the non-energy sector.

German Finance Minister Christian Lindner told CNBC on Monday, "We have to put more pressure on Putin and we have to isolate Russia – we have to cut all economic ties with Russia, but it is currently impossible (for Germany) to cut (Russia's) gas supplies."