Dollar Benefited From Risk Aversion

The dollar rebounded in the foreign exchange market, acting as a haven. The dollar index (reflecting its success versus six benchmark currencies) improved 0.46% to 90.59 points, while the euro lost 0.42% to $1.2110.0.

The U.S. bond markets have served as a safe harbor, raising yields and reducing prices. The 10-year T-Bond yield fell 3 basis points to 1.01 percent. As of March 2020, the index had hit its peak level at 1.18 percent on 12 January, in expectation of a resumption of inflation as a result of the post-Covid economic rebound.

There is a neutral movement in the currency markets ahead of the Fed meeting and the speech by its president, Jerome Powell. No revisions in the regulator’s monetary policy are expected, although Powell’s potential recommendations about the timing of the launch of the restrictions of the emergency monetary support programs for the economy are of concern. Some Federal Reserve members have previously suggested that this mechanism could commence as early as the end of 2021 and, according to several economists, Powell’s approval of this hypothesis could reverse the US dollar trend.

In this context, the revised IMF projections for the growth rate of the US economy in the coming year are worth remembering. The organization increased its estimate for US GDP in 2021 by 2 percentage points relative to the October forecast, according to the World Economic Outlook report published this week, to 5.1 percent, which is attributed to the recently agreed $900 billion packages of financial support for the economy. Unemployment will decrease with such a high economic growth rate and inflation will climb. As a result, there will be a reduction in the need for further quantitative stimulus initiatives, allowing the Fed to move to a slow normalization of monetary policy.

At the same time, the IMF has downgraded its estimates for GDP growth in the Eurozone by 1 percentage point in 2021 to 4.2 percent, owing to the prevalence of adverse epidemiological conditions and the introduction of stringent quarantine measures in some European countries. At the same time, the global GDP growth projection was boosted by 0.3 percentage points to 5.5 percent.

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