US Dollar Surges, Spurred by Powell's Speech and Ukrainian Tempest

The Fed Chair Jerome Powell hinted at a more aggressive interest rate increase, thus strengthening the US dollar exchange rate in the forex market.

The US dollar soared more than 0.8 percent above the psychologically important 120.00 threshold against the Japanese yen in Asian trading this Tuesday (22/March). The Fed Chair Jerome Powell hinted at a more aggressive interest rate increase, thus strengthening the US dollar exchange rate in the forex market. Meanwhile, the heat of the Ukrainian situation has increased oil prices and had a negative impact on a number of other currencies.

US Dollar Surges, Spurred by Powell's Speech and Ukrainian Tempest

USD/JPY Daily chart via TradingView

Difference in Bond Yields Widening

At the National Association for Business Economics conference, Jerome Powell said that a larger increase in interest rates than previously could be announced if needed to deal with rising inflation rates. The statement spurred expectations of a further 50 basis point rate hike at the FOMC meeting in May.

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Fed Funds Futures is now pricing in a 60.7% chance of a 50 basis point "Fed rate hike" in May 2022, up from a 52% chance before the publication of the text of Powell's speech. The Fed's interest rate expectations going forward are also increasing. The Fed's interest rate, which is currently at 0.5%, is expected to reach more than 2.5% in 2023.

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The impact of Jerome Powell's speech reverberated in global financial markets. Wall Street stock indexes fell, while US Treasury bond yields skyrocketed. US Treasury bond yields of 2Y, 5Y, 10Y, and 30Y are now compactly occupying their respective highest records since 2019. In turn, the increase in US Treasury bond yields also boosted the US dollar exchange rate.

At the time of writing, the US dollar index (DXY) was posting a gain of 0.44%. The greenback is ahead on all major currency pairs, particularly versus the Japanese yen and euro.

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Haruhiko Kuroda said today that Japan must maintain a loose monetary policy so that inflation does not hurt the economy. The statement contrasted with Powell's hawkish tone, further widening the gap in Japanese and US government bond yields. In fact, apart from the European Union, Japan is also a country that has been harmed by the ongoing increase in energy commodity prices.

No Progress In Negotiations

Entering the 27th day of the Russo-Ukrainian war, the path to peace is still deadlocked. The European Union accelerates raising energy imports from other regions, thereby opening up the possibility of imposing sanctions on Russia's energy export blockade. Meanwhile, Russia was laying siege to and bombarding the port city of Mariupol with demands that the local Ukrainian authorities raise the white flag.

Kremlin spokesman Dmitry Peskov said yesterday, "No significant progress has been confirmed (in the negotiation process) so far. They (Putin and Zelensky) have nothing to formalize, no agreements that they can formalize."

The series of news increased oil and gas prices to retrace its bullish trend. Conversely, the euro fell again below the 1.1000 threshold against the US dollar and is now circulating around 1.0965. The GBP/USD exchange rate was also dragged down by more than 0.3 percent to the 1.3130 range, considering that the British economy was also threatened by the impact of the Russo-Ukrainian war.