US Dollar Records its Worst Week Since August

The dollar index stayed near 96 Friday, indicating that it is on track to have its terrible week after August as risky financial assets recovered. The dollar remained weak versus stocks, bond rates, and currencies susceptible to risk as market sentiment increased as indicators emerged that omicron are far less devastating than previously anticipated.

In preliminary trials, it was shown that the new strain had a lower threat of hospitalization and creates a lighter sickness than the old one. The omicron was also discovered to be potent against a few pharma companies’ vaccinations or antivirus medicines, according to reports. Furthermore, the dollar’s decline occurred in spite of the strong economic statistics from the United States and sustained inflationary pressure, with the Fed-favored PCE index jumping to 5.7% in November, the strongest rate since 1982.

In the last few trading sessions, the US dollar suffered significant losses versus the pound, the euro and antipodean currencies in the last few trading sessions while gaining significant ground versus the safe-haven currency yen. In November, the personal consumption expenditure (PCE) price index in the United States jumped 5.70% y-o-y, the highest rise in 39 years, as a result of rises in the prices of both products and services.

Energy costs grew by 34%, while food prices went up by 5.6 % in the same period. When food and energy are excluded, the index jumped 4.70%. The PCE increased by 0.60% on a m-o-m basis, after an upwardly amended 0.70% gain in October. Prices of goods and services increased at a reduced pace of 0.9 percent in November, compared with a 1.30% increase in the previous month. Compared to the previous month, inflationary pressure in services increased by 0.5%, compared to a decrease of 0.4%. Durable goods inflation fell to 0.40% in November from 1.40 percent the previous month, a significant slowdown from the previous month’s 1.40 percent.

Additionally, non-durable items Inflation maintained at 1.20% for the third consecutive month. PCE prices increased by 0.50% in the absence of food and energy, outpacing consensus expectations of a 0.40% increase. The euro to dollar rate hopped back above 1.13 against the backdrop of a fresh research suggesting that the latest variant of the coronavirus may be a gentle strain, while the common currency was also helped by a drop in prices of natural gas in Europe.

Over the course of the week leading up to Friday, the Eurodollar gained ground versus rest of the low-yielding currencies and perhaps even beat some of its rivals that would ordinarily perform better in a bullish market for riskier assets. A weakening US dollar and a double-shot combo of positive events in other markets combined to push the Euro-Dollar rate gradually from Monday’s initial lows of about 1.1230 to levels over 1.13 ahead of the Xmas break.

“Risk assets are being supported by guarded anticipation that Omicron will be less harsh than Delta variant. As a result of a trilogy of exploratory investigations, the Omicron variation is associated with a much reduced hospitalization threat than the Delta version,” says Elias Haddad, an analyst with the Commonwealth Bank of Australia.

This week’s most significant development for the Euro-Dollar rate was the publication of a number of studies, this again from academics in Britain, that seemed to validate South African researchers’ prior conclusions that the Omicron coronavirus strain may be a moderate type. In investigations conducted in England, Scotland, and South Africa, researchers discovered that the risk of hospitalisation was in the range of 15% to 80% lower with the omicron variation than with the delta strain, as per a findings of the study published in the British Medical Journal.

“As a result, the Euro-Dollar rate rose on Thursday, which was a good thing for all nations that are having problems caused by prohibitions on social interaction and economic activities, a portion of which are in Europe. Sliding natural gas prices were already quoted by experts as a contributing factor to the rise in the Euro-Dollar rate. For the rest of 2021, the euro should move in pace with its rivals but monetary policy disparity continues to be the key cause of depreciation versus the dollar the medium run.”

“Dutch natural gas prices have fallen 20% Friday, which is putting considerable pressure on the euro,” notes Shaun Osborne, chief foreign exchange analyst at Scotiabank. “A lot of US LNG ships are apparently approaching Europe to augment dwindling gas exports from Russia,” he adds.

“The euro continues to receive support at 1.13, and if it manages to remain higher than the aforesaid level over the upcoming trading sessions, there is likelihood of the euro re-testing the 1.15+ resistance barrier and ultimate range breach.” Last Thursday, Osborne and associates wrote in a report that the 1.1265 zone is the next level of support beneath 1.13.

According to some estimates, up to 30 tankers were already on their way to Europe from the United States, delivering liquefied natural gas, after the European prices surpassed those recorded in rest of the continents, causing rates in the Europe to fall.

“We should keep in mind that during the onset of the gas shortage earlier in 2021, the situation was reversed. Nevertheless, it is unclear how much the surprise LNG supplies will help to relieve the region’s energy constraints, according to Bas van Geffen, a senior macro analyst at Rabobank. Gazprom says that it is fulfilling all of its responsibilities, and Russia maintains that the reduced supply is tied with geopolitical difficulties. It’s possible that the low levels of shipments are due to the frigid weather in Moscow, however the timeliness would undoubtedly raise some suspicions,” van Geffen said.

However, despite the fact that all nations have seen significant rises in energy costs in 2021, with US oil prices surging by over 50% as well as some natural gas prices for futures contracts going up by almost 500% in 2021. Europe and the United Kingdom are broadly treated as being particularly vulnerable to increasing energy costs. It is not yet clear if natural gas supplies from the United States will continue, or whether their price-depressing effect will be maintained.

The ‘energy security threat premium’ in the EUR is expected to endure in 2021, given the many events that have taken place. “Europe’s energy shift and considerably large input prices, in our opinion, will function as headwind on domestic economic growth, industrial profitability, and the Euro Area’s competitive nature (especially when compared to Asia),” says Stephen Gallo, European head of foreign exchange strategy at BMO Capital Markets.

As the Fed moves closer to lifting off while the ECB wants to continue along the QE route, our underlying expectation is that the EURUSD will be driven modestly lower throughout H1 2022, with rate fluctuations supporting the USD. BMO’s Euro estimates were reviewed in December, when Gallo and associates reported 1.10 and 1.13 for the three-month and twelve-month forward periods, respectively.

Even though higher energy prices have had a crippling effect on the Eurodollar, it was the deviation in monetary policies between both the European Central Bank (ECB) and the Federal Reserve (Fed) that was responsible for the majority of the Euro-Dollar rate’s -7.14% drop in the fiscal year ending on Friday.

This gap has also been extensively mentioned by numerous experts as the primary cause for forecasts of more Euro-Dollar falls throughout the remainder of 2022, despite the fact that the central banks’ strategy revisions in December accomplished nothing to alter the Forex market’s gloomy outlook.

“The unknown level of investors’ tolerance for risk is the primary cause of anxiety (and upside danger) in our EUR forecast,” says the author. We acknowledge that, despite our preference for EUR-funded ‘carry’ bets in 2022, moments of significant ‘risk-off’ in international markets will first drive out EUR bears (short positions) and lend assistance to the euro by removing rate rise forecasts from non-EUR yield curves. According to Gallo of BMO, “a turnaround in oil prices would also be of assistance.”

As regards the policy position, the Federal Reserve expedited the closure of its quantitative easing program, which is now scheduled to end in March 2022, instead of June. The ruling came amid economic projections that displayed a vast bulk of Federal Open Market Panelists observing themselves as intending to vote for three rises in the Federal Funds interest rate in 2022, as they did in December.

With respect to the European Central Bank (ECB), it has drafted a solid plan to eliminate its €1.85 trillion Pandemic Emergency Purchase Program in March and gradually restore its pre-pandemic rate of buying based on the bank’s initial Asset Purchase Program in the months leading up to October 2022. However, Frankfurt has persisted to dissuade the market participants from foreseeing any modifications to its benchmark rate in the short-term conceivable future.