US Dollar Maintains Dominance Amid Russian Invasion

Russia's invasion of Ukraine has the potential to influence global monetary policy, where the US dollar might benefit from the less hawkish stance of central banks.

The US dollar index (DXY) has receded from its record high reached yesterday at 97.73 levels. The greenback exchange rate has also started to moderate versus some major currencies. However, the push for the US dollar rally was still strong due to the heat of the Russian invasion of Ukraine. When the news was written at the beginning of the European session (25/February), DXY was circulating in the upper range of the 97.00 threshold.

US Dollar Maintains Dominance Amid Russian Invasion

Russia's invasion of Ukraine continues, despite Moscow facing a flood of protests from various quarters. The latest news reveals that fierce fighting is underway near the Ukrainian capital, Kyiv.

The United States, the European Union and a number of other countries are intensifying the wave of sanctions against Russia. Sanctions were imposed on Russian banks, individuals and state-owned enterprises with the aim of hindering their ability to do business abroad. British PM Boris Johnson even urged Russia to be immediately kicked out of the SWIFT international payment system. Nevertheless, Russia continues to bombard Ukraine.

This is the largest military operation in Europe since World War II, so many people are worried that the domino effect will spread to an international scale. There are also fears that war will spread to other countries, after news spread of the entry of 9 Chinese warplanes into Taiwan's air defense zone.

"The first order impact (of the conflict) is of course on Russia and Ukraine... but there is an impact on the Asia Pacific forex and bond markets as well," said Riad Chowdhury, head of APAC at MarketAxess, as reported by Reuters. He underlined the flight of capital in global assets towards the dollar, yen and developing countries.

The Russo-Ukrainian war also has the potential to influence the orientation of global monetary policy. A number of US officials said that this war may slow the pace of monetary tightening, but will not completely stop the Fed's rate hikes. Meanwhile, a number of European Central Bank (ECB) officials actually considered that war could hinder their efforts to end monetary stimulus (Quantitative Easing) going forward.

Invesco strategists noted, "We expect the consequences (Russia-Ukraine conflict) to translate into a less hawkish stance from the major central banks - leading the Fed towards a rate hike of 25 basis points in March (and not 50 basis points-ed). ) as well as continuing ECB doubts."