By Swann Collins, investor, writer and consultant in international affairs – Eurasia Business News, May 20, 2022

Dow Jones Stock Exchange, Manhattan, New York City- Photo credit : Swann Collins.

The U.S. dollar rose again on Friday against the euro and major currencies, playing its role as a safe haven, while the New York Stock Exchange, again in decline, entered bear market territory for the first time since the pandemic-driven selloff of 2020.

Around 19:00 GMT, the euro fell 0.43% to 1.0542 dollar while it appreciated slightly earlier in the session.

The Dollar index, which compares the greenback to other major currencies, advanced 0.50% to 103.23 points. The dollar hit a 20-year high late last week, before retracting sharply. Over the week, the US currency remains in decline, like the U.S. stocks markets.

The U.S. S&P 500 stock index fell 1.8% today and is on track to close at least 20% below its January high. The Dow Jones Industrial Average lost about 451 points, or 1.5%, to 20801. The tech-focused Nasdaq Composite lost 2.5%.

The rally on U.S. dollar on Friday followed the opposite curve of that of stocks on Wall Street, which after an attempt to rebound at the opening, fell again, dragging the S&P 500, an index more representative of the US market, into the “bear market” zone or bear market, that is to say 20% below its peak at the beginning of the year.

Government bonds rallied Friday, benefiting from investors flocking toward assets that tend to perform well in times of economic stress. The yield on the benchmark 10-year U.S. Treasury note fell to 2.785% Friday from 2.854% on Thursday. Bond prices rise when yields fall, reported the Wall Street Journal.

The current raise fo U.S. dollar is a paradox because it happens amid high inflation, a phenomenom which means that currency loses purchasing power. The situation is now critical in the United States, where annual inflation reached a record high of 7.9% in February and 8.5% in March. This is the highest level of inflation ever seen in the United States since February 1982 and the momentum has been there for months. US inflation has already reached 7.5% in January after reaching 7% in December 2021, 6.8% in November and 6.2% in October.

Still, the trajectory of the U.S. currency raised questions. Has the rise of the dollar come to an end or is there still some way to go? In addition, the dollar has been challenged since March by Russia, China and India as the main reserve currency, amid Western sanctions agasint the Russian banks and companies. Russia, China and India has been buying more gold over the past few years, in what we can consider as a policy to free their economy from the dollar.

Currency traders are divided on the issue. Deutsche Bank believes in particular that “with the Fed’s (Federal Reserve) rate hike forecasts in 2022 (after the rate of March 16 and May 4) reacting to indicators on the US economy and other major central banks accelerating rate hikes, the conditions are in place for an adjustment in currency prices.

The dollar has been boosted in recent months by the U.S. Fed’s desire to tighten monetary policy quickly, while other central banks, especially in Europe, must spare economies affected by the war in Ukraine and by Covid-19 resurgence in China.

Weak economic indicators in the United States this week, and a more determined message from members of the European Central Bank (ECB), contributed to the decline of the greenback over the week (-1.38%).

In the short term, I think that the market will remain volatile: it is difficult for the euro to record high gains given the lack of risk appetite of investors. Investors will choose a middle path : they will buy dollars but also gold bars and coins to secure their purchasing power amid high inflation and falling stock markets.

Read also : How to invest in gold

Gold prices remained stable today, reaching $1,849 per troy ounce, before stabilizing at $1,843 per troy ounce on May 20, 2022 at 3:15 p.m. New York time.

Gold is a good asset in tough times. In almost any crisis, it shows growth. The yellow metal has always been a great hedge against inflation because it rises in price when the cost of living standards rises. 

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© Copyright 2022 – Swann Collins, investor and consultant in international affairs.