The dollar surged and government bonds rallied on Monday, while stock markets tumbled, as traders considered the prospect of further aggressive interest rate rises in the US and intensifying recession risk in Europe.
The dollar index, which tracks the US currency against six others and has a large euro weighting, rose 0.9 per cent to a fresh 20-year high. That ascent helped to push the euro closer to parity with the greenback, with Europe’s common currency dropping as much as 1.3 per cent to $1.0051 — approaching a level not seen for nearly two decades.
The Japanese yen also fell to a fresh 24-year low against the dollar of ¥137.75 before strengthening slightly.
Market sentiment in recent weeks has swung between a recognition that central banks need to raise interest rates aggressively to combat soaring inflation and a more forward-looking view that excessive monetary tightening may cause a global economic slowdown.
Both narratives have firmed investors’ bullishness towards the dollar, particularly because recession risks are perceived to be higher in Europe.
The European Central Bank has followed the US Federal Reserve into tightening monetary policy, but is expected to remain as dovish as possible to counter economic shocks from Russia’s invasion of Ukraine.
“We’re expecting a recession earlier in Europe,” said Sonja Laud, chief investment officer at Legal & General Investment Management. “The US is an energy exporter, Europe is an importer, and in the current energy price environment that makes all the difference.”
Read more about today’s market moves here
