04.04.202208:54 Forex Analysis & Reviews: Three traps for USD: inflation, sanctions, and punches from other currencies

A number of global currencies are eager to erode the dollar's reign and replace it as the number one reserve currency. For the time being, their efforts have been to no avail. Such punches look like bites from low-rank animals aiming to dent power of the alpha male in a herd. All in all, the US dollar is taking the lead, though it takes huge efforts to assert strength.

The US dollar faces a challenge whenever it is targeted by loud statements about de-dollarization of the global financial system. A lot of analysts reckon that Russia is able to deal a blow to the dollar's reign by its requirement made to Western buyers to settle gas payments in Russian rubles. This could be the first step towards new principles of cash circulation. Such prospects are bearish both for the US dollar and the euro. The latter has weakened a lot on the back of the geopolitical conflict.

The US dollar opened a new trading week with a confident growth. The greenback finds support from rising yields of US Treasuries that, in turn, are propelled by expectation of aggressive rate hikes by the Federal Reserve. The single European currency is less lucky. It is pinned at the lowest levels of 2022 on the back of the looming embargo on Russian gas imports. On Monday, April 4, the US currency appreciated notably against the euro and the Japanese yen. EUR/USD is trading at about 1.1046 in anticipation of the rate hike at the nearest Fed's policy meeting. Previously, large market player increased long positions on USD ahead of the last Fed's meeting.

EUR is weighed down by concerns of serious global economic damage from the Russia – Ukraine conflict. The euro has been firmly stuck at its two-year lows. Experts at Commonwealth Bank of Australia warn that escalation of the military hostilities and a further rise of energy prices will push EUR/USD down to 1.0800. Alternatively, some improvements in the geopolitical conflict will encourage a rally in EUR/USD with its price rising to 1.1150.

Earlier on Monday, market participants responded to the macroeconomic data released on Friday, April 1. According to the US nonfarm payrolls, the unemployment rate edged down to 3.6% in February, the lowest level in two years. The US public and private sectors created 431,000 jobs, excluding farm employment. Analysts believe this situation will cement the Fed's intention to struggle against soaring inflation by sharp rate hikes. Experts at Westpac are also certain that the regulator will stick to the hawkish rhetoric that implies aggressive monetary tightening.

In this context, the US dollar index has solid fundamentals to flex its muscles. Its index is likely to surpass the psychological level of 100 points in the coming weeks. At present, it is consolidating at about 98.529. The Fed's hawkish monetary policy fuels the US dollar's rally. If its index overcomes resistance at 99.25, the door will be open towards the psychological level of 100, the strongest mark in two years.

Meanwhile, the US dollar is the clear winner against the backdrop of market turbulence and the hostilities in Ukraine. Apparently, the greenback will walk away with minor losses.