Impact of the of the Russia/Ukraine conflict on the FX Markets

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Since our last update on the economic impact of the Russia/Ukraine conflict, conditions within the currency markets have remained increasingly volatile. For the first time in two decades, the euro and the US dollar hit parity, causing major concern for the euro while the USD benefits from its status as a safe-haven currency and further aggressive rate hikes from the US Federal Reserve. While the Fed’s decisive action may be driving the US dollar higher, it could be a sub-catalyst for the global recession so widely feared.

Commodity currencies have fared relatively well due to the rapid response from many nations to vastly reduce dependence on Russian energy exports. For example, the Canadian dollar subsequently hit a nine-year high against the pound amid increased demand for oil (and soaring UK inflation). As the war rages on, however, commodity prices have failed to keep their strength, plummeting in recent weeks as the strain on the global economy – and fears of a global recession – continue to deepen.

The International Monetary Fund has even warned of a ‘collapse’ for certain economies, and while the euro may not yet be in that category, Europe’s front-line positioning means that the situation for the single currency has gone from bad to worse, with the spiralling energy crisis alone having the potential to spark a long and harsh recession. What’s more, many have criticised the European Central Bank’s tardiness in raising interest rates relative to other central banks, adding to the euro’s woes and causing it to sink even further in recent weeks, most notably against the US dollar.

Recognising first and foremost the veritable humanitarian crisis caused by Russia’s invasion of Ukraine, on an economic level, inflation is the main ensuing affliction of the conflict and the impact will continue to be felt in households around the world. The major threat to food and energy supply caused by the war is continuing to send the cost-of-living soaring, with talk of ‘energy rationing’ mounting in Europe and the UK.

While we spoke of the potential for a fall in USD value in our last update, the greenback’s global dominance remains intact for now, while the euro and the pound continue to suffer more of the spill over effects of the war. However, the political situation and therefore the economic situation remains volatile, and so central banks must make tough decisions to bolster their currencies, fight inflation and ultimately avoid an approaching global recession.