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Dollar Soars; Sanctions Escalation Prompts Safe Haven Demand

By Peter Nurse - The U.S. dollar soared in early European trade Monday, while the ruble plummeted to a record low, as enhanced sanctions by the West on Russia for its invasion of Ukraine lifted demand for the world’s reserve currency.

At 3:05 AM ET (0805 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.5% higher at 97.115.

Western powers escalated the pressure on Russian President Vladimir Putin by blocking over the weekend several major Russian banks from using the global SWIFT payment system.

"Exclusions from SWIFT will lead to missed payments and giant overdrafts similar to the missed payments and giant overdrafts that we saw in March 2020,” Credit Suisse analysts said Sunday, in a note.

This could push central banks, and the Federal Reserve in particular, to enhance liquidity to offset missed payments, the Swiss bank added.

Additionally, the EU and U.S. announced moves that effectively froze over half the extent of the Russian Central Bank's foreign reserves.

This is resulting in traders seeking out the dollar, the globe’s reserve currency, main safe haven and most liquid asset.

On the flip side, the ruble tumbled to a record low against the dollar on Monday, prompting the Russian central bank to raise its key interest rate to 20% from 9.5%, with companies urged to sell foreign currency to try and defend the currency.

At 2:55 AM ET, USD/RUB rose over 11% to 92.7400, having earlier climbed as high as 117.8170, a new all-time high.

Russia's economy is likely to contract 20% in the second quarter and by around 3.5% for the full year given these intensified sanctions, JPMorgan said on Monday.

"The two pillars of the economy even in the midst of slowing growth, rising inflation, and high interest rates were the 'fortress' FX reserves of CBR and Russia’s current account surplus. Not anymore," JPMorgan (NYSE:JPM) added.

Given the extreme market volatility, investors will look this week at testimony on the economy and monetary policy by Fed Chair Jerome Powell, before the House Committee on Financial Services on Wednesday, and again before the Senate Banking Committee on Thursday.

The Federal Reserve had widely been expected to lift interest rates at its next meeting in March, potentially by as much as 50 basis points, but the officials must now weigh the geopolitical and economic fallout from the conflict in Ukraine against plans to curb soaring inflation.

Elsewhere, EUR/USD fell 0.7% to 1.1187, with Europe bearing the brunt of the impact from Russia’s move into Ukraine, with higher energy costs likely hitting growth in the region. The Polish zloty was partic8ularly hard hit, falling 1.6% against the euro and 2.4% against the dollar.

USD/JPY fell 0.1% to 115.52, with the yen seeing some safe haven flows but factory output fell 1.3% in January, adding to concerns that the economy could shrink this quarter as public health restrictions weigh on activity.

The risk sensitive AUD/USD fell 0.4% to 0.7202, GBP/USD dropped 0.2% to 1.3380, while USD/CNY fell 0.1% to 6.3109.

Additionally, USD/TRY fell 1.3% to 13.8810, after Turkey’s economy expanded more than predicted in the fourth quarter of last year, with GDP rising 9.1%, driven by a surge in domestic consumption and exports.

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