Why Putin’s Statement is Negative for the Dollar
The U.S. dollar is trading lower against a number of the major currencies today on the back of comments from Russian President Vladimir Putin. With the release of relatively benign U.S. data, the leading driver of currency flows continues to be the ongoing developments in Crimea and Russia. This morning, Putin officially signed a treaty to accept Crimea into the Russian Federation and in a direct challenge to the West, the Russian government has moved fast to bring Crimea into its fold. Within 3 months, they expect the Ruble to replace the Ukrainian hryvnia as the local currency. Putin also announced plans to respond to US and EU sanctions with their own restrictions. Their complete rejection of the West’s calls to de-escalate tensions should have led to a flight to quality into U.S. dollars but the greenback traded lower as investors latched onto the hope that Russia’s incursion into Ukraine will stop at Crimea.
According to Putin, there is no need to break up Ukraine even further and if he stays true to his words, the tensions between Russia and the West could begin to fade and the improvement in risk appetite along with the sell-off in the U.S. dollar could become real. This mere possibility has already driven equities higher and the dollar lower. Unfortunately we feel this positive sentiment is still wishful thinking because sanctions from Russia could lead to a more aggressive response from the West. Russia has already been suspended from the G8 and could be isolated even further. They also boosted their troops at the Ukraine border, raising concerns that they are poised for a quick invasion that explains why euro has given up its initial post Putin gains. So while Russia’s statement today could be negative for the dollar, actions speak louder than words and so far, there are plenty of reasons to believe that the crisis in Ukraine will worsen before it improves.
Meanwhile this morning’s U.S. economic reports had very little impact on the dollar. Consumer prices grew at a steady 0.1% pace in the month of February but inflation remains extremely low with year over year gains slowing to 1.1% from 1.6%. Housing starts dropped 0.2% last month but with the sharp upward revision to the January report and the strong rise in building permits, the outlook for the housing market remains strong. None of these reports will alter the central bank’s plans to taper asset purchases by another $10 billion on Wednesday.