A dramatic scenario that boosts the dollar

Scenario that boosts the dollar

The war generated by Russia’s invasion of Ukraine, which took place on Thursday, February 24, is taking on a more dramatic tone every day. The blunder, by the Russian army, of the largest nuclear power plant in Europe, and located precisely in Ukraine, aroused even more alarms on Friday morning, causing a general collapse of the euro and the pound sterling.

The markets do not see reasons to cushion the fall of both currencies, at least for now. Soon, the European Central Bank and the Bank of England will have to decide on monetary policy, and it is better not to be in the shoes of their authorities.

With an open war with no end in sight and getting worse by the day, and with inflation at 4-decade highs, Mrs. Lagarde, next Thursday, and Mr. Bailey, in just under two weeks, will have to convince the markets of what they are doing. It will be more difficult for Lagarde. For now, the ECB does not intend to raise interest rates, despite rampant inflation, and the cost of natural gas, which as if this were not enough, comes mostly from Russia, is at record highs. Oil does too, with levels not touched since mid-2012.

In the case of the Bank of England, the third increase in rates is almost discounted by the markets, and the situation of the pound may improve significantly in this circumstance. Of course, this will be as soon as it is known that the Fed will also raise the rate.

Precisely, and ignoring the fact that the greatest focus of attention not only in the markets but also in the world, is on the war, the most important event of these days was the presentation of the president of the FedJerome Powell, before Congress. Powell relieved the stock markets, foreseeing that he will only raise the interest rate by 0.25%, something that with inflation above 7.5% only reflects the good intention of showing that the central bank is not completely disregarding what it’s happening.

The main driver of the stock market in recent years has been the central bank, with its often unjustified injections of liquidity, and it is not Powell’s intention to be the one to change this state of affairs. Therefore, he takes pains to want to be cautious about inflation, but flexible with the markets. The result is in sight: inflation reaching 8%.

The yen closes the week with gains, after several days of doubt. Its growth appears to be more than logical and expected, as is that of the ounce of gold. With the war going on, the yen can only grow. Gold hit $1,974.00 at its high last week, and it shouldn’t take long to break above that level if things get tough over the weekend.

Just as the yen strengthens, so do the Latin American currencies, as a result of the increase in raw materials. Both in Peru and in Chile, which has just come from two complicated electoral processes, as in Brazil, Uruguay and Colombia, the dollar gave up a good part of its gains for several months and stands at annual lows. In Argentina, the free exchange rate also yields, although in its case inflation imposes a revaluation of the exchange rate of approximately 5% per month so as not to be out of focus.

Next week will be important, although not decisive. It is clear that at some point the war will take a clearer direction, and a winner will appear. Commodities will start to stop their respective gains, and the markets will have to calm down. That will hardly happen in the next few days.