The US dollar is rising against virtually every peer as fallout from the deepening conflict in Ukraine supercharges demand for the world’s reserve currency. Treasuries also rallied.
The Norwegian krone and Swedish krona tumbled more than 2%, the worst performers among the Group-of-10 currencies. The risk-off move saw S&P 500 futures drop almost 3%, while traders braced for contagion in emerging markets by selling every developing currency.
“USD is king, offering liquidity and safe haven attributes,” said Rodrigo Catril, a currency strategist at National Australia Bank Ltd. in Sydney. “When trouble hits the road, you need to look for cover.”
A gauge of the dollar rose as much as 0.6% on Monday, extending on last week’s 0.4% gain as Western nations ratcheted up sanctions on Russia over its invasion of Ukraine. Investors are seeking shelter as market volatility surges on the conflict that’s adding to global inflationary pressures.
Global bonds rallied, with 10-year Treasury yields dropping 5 basis points to 1.91% while yields on Australia 10-year government debt slumped 10 basis points. US equities futures slid, with the Nasdaq 100 down about as much 3.5%.
See also: Russia resumes Ukraine grain-export deal in abrupt reversal
“Europe is bearing the brunt of the invasion’s initial impact, with higher energy costs hurting consumers and the level of sanctions pressuring European growth, with a knock-on effect for US growth prospects,” Scott Glasser, chief investment officer at Clearbridge Investments and investment specialist Jeff Schulze, wrote in a note.
Signs of funding strains became apparent in major money markets early Monday as spreads widened for very short-term eurodollar contracts. The gap between future Libor and Fed rates -- the FRA/OIS spread -- widened nine basis for one-month contracts, the most since March 2020. March eurodollar contracts dropped relative to June peers, a classic sign of funding stress.
SWIFT Risk
See also: Russian Odesa missile strike tests Ukraine grain export deal
Investors are zeroing in on Western nations’ decision to exclude some Russian banks from the SWIFT platform used for trillions of dollars worth of transactions around the globe.
The ban could result in missed payments and giant overdrafts within the international banking system, spurring monetary authorities to re-start daily operations to inject dollars into the market, according to prominent Credit Suisse Group AG strategist Zoltan Pozsar.
Russia also has about US$300 billion ($405.76 billion) of foreign currency held offshore -- enough to disrupt money markets if it’s frozen by sanctions or moved suddenly to avoid them, he said in a note last week.
The Russian ruble, which rebounded to the 83 per dollar level on Friday, will also be in sharp focus when onshore trading starts Monday.
“Russia’s ex-communication from SWIFT would isolate Russia financially from the world and could cripple its economy,” Jason Schenker, president of Prestige Economics, wrote in a note.
Photo: Bloomberg
