Any curbs to Russian access to its foreign reserves could present a bigger blow to the Russian economy than the impact of a ban on Swift.
Russia’s invasion of Ukraine, the biggest attack on an European state since World War two, has thrown global markets into turmoil.
Sanctions, while intended to be a display of Western resolve against Russian aggression, are affecting markets in different ways – some fear their severity will hurt the West more than Russia, others are taking comfort from the reluctance so far to disrupt energy markets.
The Russian economy must be impacted with the ruble devaluing significantly. That will send prices for imports into Russia surging, while sanctions on Russia’s largest banks wreaked havoc in the financial markets and new export restrictions promised to scramble supply chains.
The US and some of its allies will ban some Russian banks from being connected with Swift and make sanctions against the Central Bank of Russia.
Also the US, UK, Canada, France, Germany and Italy have signed on to a statement saying they will stop the Central Bank of Russia from using its foreign reserves in order to undermine broader sanctions.
There is another argument at play too. The backdrop that existed before the crisis – the inflation problem – has not gone away. Market participants are now trying to gauge how central banks will react: will hawks press on with tightening, or will doves find support for delaying action in the face of the new turmoil?
Investors have been watching the unfolding conflict in Ukraine and how it could affect the global economy. The U.S. Federal Reserve has also been taking stock of how this might affect their plans for a tighter monetary policy.
Looking at the currency market response and the expected flight to safety due to the situation in Ukraine, the US dollar has been boosted rather than the traditional safe havens of the yen and Swiss franc.
The US dollar index has hit an 18-month high when USD is measured against a basket of currencies.
AUD/USD: the Aussie hit a 1 month high last week nearing 73 US cents on hopes the RBA would increase interest soon, however with the Russian invasion of Ukraine the risk-off stampede hurt the AUD with it dropping 2 cents on Friday.
CAD/USD: After falling to a 1 month low last week the Canadian dollar has been boosted, perhaps due to potential increase value of its gas and oil exports on the markets.
EUR/USD: The euro has steadied after last week’s sharp declines. The euro was last at $1.1191, edging up against the dollar, having touched its lowest price $1.1110 since May 2020 on Thursday.
GBP/USD: The British pound has stabilised, recovering from a two-month low on Thursday after investors rushed into safe-haven currencies like the Japanese yen and the U.S. dollar following Russia’s invasion of Ukraine.
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