Hawkish Fed, Geopolitics Keep Dollar Elevated

Photo by Cristina Glebova on Unsplash

The US dollar is back on the offensive after a short-lived retreat triggered by profit-taking on Tuesday. The greenback bounced off local lows around 98.30 to retarget the 99.00 figure that capped the previous rally. The USD index has been advancing north for the fourth session in a row, adding nearly 0.3% on the day.

The safe-haven demand for the greenback reemerged as risk sentiment turned sour during the European trading hours following positive trends seen in Asia. Investors continue to take profit on rallies amid the persisting geopolitical uncertainty surrounding Russia-Ukraine crisis. Earlier in the day, Russian Foreign Minister Sergey Lavrov said that talks with Ukraine were difficult because Kyiv was constantly changing its position. He also warned that sending peacekeepers to Ukraine may lead to a direct confrontation between Russia and NATO. The warning might have added to a more cautious tone in the markets ahead of the North America trading session.

Also, the greenback remains well supported by a more hawkish shift in Fed’s rhetoric. As such, Lorretta Mester became the latest FOMC member to support 50bps rate hikes at upcoming meetings. More aggressive tightening measures this year could give a solid lift to the USD in the longer run due to widening monetary policy divergence. 

Technically, the outlook for the USD index remains constructive, albeit there are some short-term bearish risks as well. The prices could retarget May 2020 tops seen earlier this month around 99.40 should the 99.00 barrier give up anytime soon. In the downside, the immediate significant support now arrives at 97.70, followed by the 96.60 region.