27.04.202210:32 Forex Analysis & Reviews: Will the dollar stay on top?

Many analysts and market participants are concerned about the question: how long will USD be able to stay at peak positions? The current strengthening of the dollar will sooner or later end with the subsidence of the latter. However, experts expect that the decline in greenback will be moderate.

By the middle of this week, the US currency peaked, approaching the high values of seven years ago. On Wednesday, April 27, the greenback was at its highest level since the beginning of the COVID-19 pandemic. According to experts, April has become the best month for the greenback since 2015. This was facilitated by the prospects of the next Federal Reserve rate hike and impressive cash flows into safe haven assets, primarily in gold and USD.

The greenback is steadily getting more expensive ahead of the Fed meeting scheduled for next week. According to analysts' observations, this month the US currency has grown at the fastest pace in the last seven years. USD is supported by market expectations regarding the Fed's rate hike by 0.50% at once.

At the moment, stock markets take into account in prices the rise in the federal funds rate by 1% at the central bank's next meetings (in May and in June), as well as its growth by an additional 2.50% until the end of 2022. Expectations of the Fed tightening the monetary policy gives a new impetus to the dollar's appreciation.

The US currency is increasing its positions, despite the relatively negative statistics from the United States. According to latest reports, sales of new buildings in the country decreased by 8.6% to 763,000 in March, falling short of the 765,000 forecast. The consumer confidence index in the US economy also sank (to 107.3 points from the previous 107.6 points) in April. These indicators reduce the dollar's chances of short-term growth, but do not interfere with its dominance in the medium and long-term planning horizons.

Against the backdrop of a growing dollar, its rival, the euro, looks pale and is rapidly losing points. Earlier, the European currency seriously sank due to concerns about the impact of the Russian-Ukrainian conflict on the eurozone economy. The European Central Bank's indecisiveness in tightening monetary policy and raising rates adds fuel to the fire. According to these parameters, the ECB is significantly inferior to the Fed.

Experts fear a further decline in the euro amid an increased risk of stagflation, which could paralyze the European economy. Recall that stagflation is characterized by a slowdown in economic growth at high rates of inflation. However, the implementation of such a scenario is unlikely.

Two factors are of particular relevance for the further dynamics of the American and European currencies: restrictions in China related to the new outbreak of COVID-19, and the Russian-Ukrainian conflict. The hardest thing in the new reality is for the euro, who is constantly teetering on the verge of falling. Against this background, it is difficult for the EUR/USD pair to stay afloat. The pair demonstrated a downward trend on Tuesday, April 26, reaching 1.0746, and then headed to the critical level of 1.0696. Then the EUR/USD pair was cruising near 1.0629 on the morning of Wednesday, April 27. The pair risks collapsing to 2020 lows, while its further active recovery is questionable.

According to analysts, the prolonged Russian-Ukrainian conflict increases the risk of an energy crisis against the background of a complete embargo on energy imports to Europe. The implementation of such a scenario provokes chaos and further subsidence of the European economy. The current situation puts pressure on the euro, which simultaneously opposes the strengthening dollar. The latter is supported by market expectations regarding the tightening of the monetary policy in order to curb inflation.

The greenback is still supported by the hawkish rhetoric of Fed Chairman Jerome Powell, and the high probability of raising the key rate by 50 basis points (bp). In addition, Powell declared his readiness to follow a course aimed at tightening monetary policy. At the same time, market participants expect an accelerated reduction in the balance of the Fed.

After the central bank's May meeting, it is possible to clarify the nuances of the quantitative tightening program. The current situation is in the hands of the greenback, as the prospect of active rate hikes and the use of other tools to normalize monetary policy increase its appeal. This gives the USD an edge over other currencies.