The dollar is strengthening as inflation fears dampen risk sentiment.
The US dollar rose across the board on Tuesday as Treasury yields rose and investors’ risk appetite was dampened by concerns about a further acceleration in global inflation.
The dollar was bolstered by demand for safe havens. Stocks in the United States fell on Tuesday as investors were alarmed by rising oil prices and hawkish remarks from a Federal Reserve official.
Treasury yields in the United States rose on Tuesday, a day after Fed Governor Christopher Waller stated that the Fed should be prepared to raise interest rates by a half percentage point at each meeting from now on until inflation is significantly reduced.
The US Dollar Currency Index , which measures the value of the US dollar against six major currencies, was up 0.5 % at 101.92, on track for its best one-day gain in nearly two weeks. The dollar index, which has gained about 6.6 % this year, is down 1.2 % in May, on track for its worst monthly loss in a year.
Tuesday’s bounce in the U.S. dollar suggests better support for the dollar index around its 50-day moving average, which the index has been testing over the past couple of sessions, Shaun Osborne, chief currency strategist at Scotia Bank, said in a note.
The dollar index has not closed below its 50-day moving average since mid-February but has drifted closer to it over the last several sessions.
“We think the USD is unlikely to rally significantly and still consider price action to reflect the early stages of a broader reversal in the recent USD bull trend.” Osborne said.
For now, the euro remained weak as data on Tuesday showed euro zone inflation hit a record high in May, adding pressure on the European Central Bank as it fends off a recession and looks to curb high prices with gradual interest rate increases in coming months.
Inflation in the 19 countries sharing the euro accelerated to 8.1% in May from 7.4% in April, beating expectations for 7.7% as price growth continued to broaden, indicating that it is no longer just energy pulling up the headline figure.
Against the dollar, the euro fell 0.6% to a 5-day low.
News that European Union leaders agreed in principle on Monday to cut most oil imports from Russia by the end of this year sent oil prices higher and offered some support to commodity currencies.
The Canadian dollar (CAD=D3) touched 1.2653 per dollar, near a one-month high struck overnight, ahead of Wednesday’s Bank of Canada meeting at which all 30 economists polled by Reuters expect a 50-basis-point rate hike to 1.50%.
In cryptocurrencies, bitcoin climbed 0.42% to $31,363.19, a near 3-week high.
High Eurozone inflation hits a record 8.1 % , causing bank shares to plummet.
Since the outbreak of the Ukrainian conflict, the Economic Sentiment Index (ESI) has been significantly lower than before. It has historically been quite high but is not linked to an economic downturn; it is currently hovering around 105.
Nonetheless, the annual inflation rate in the Eurozone rose to 8.1 % in May 2022, a new high compared to previous months. According to estimates, energy prices continue to rise, followed by food, alcohol, and tobacco.
Meanwhile, shares of major bank stocks in the Eurozone have lost 1% in today’s session at the time of writing.
European equity markets mostly dropped at the market open as stubborn inflation fears have resurfaced. Apparently, the French economy shrank in the first quarter, while the CAC 40, the French stock index, lost 0.6% at the time of writing.
Societe Generale SA and BNP Paribas SA , the two major banks in France, have lost 17.5% and 12.4% year-to-date , respectively.
Meanwhile, Frankfurt’s benchmark DAX index lost 0.7% at the time of writing, with Deutsche Bank AG (ETR: DBK) losing 8.45% YTD. Following this trend were Italian banks UniCredit SpA (BIT: UCG), Intesa Sanpaolo SpA (BIT: ISP) and Mediobanca Banca (BIT: MB) dropping 20.81%, 13.45% and 6.34% YTD.
On the other hand, all of the bank stocks recorded increases in their share prices for May, with Unicredit leading the way with a 25.73% gain over the month.
In summary, the economic environment is showing modest signs of slowing; however, post-pandemic spending and growth could boost economic growth enough to counteract some of the negative effects of inflation.