Stocks week ahead: War in Ukraine has sparked a scramble for dollars

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CNN Business
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The US dollar serves as the backbone of the global economy and is considered the safest currency to hold. So in times of uncertainty, investors like to stock up.

What’s happening: The dollar rose to its highest level since spring 2020 last week as fears grew about how Russia’s war in Ukraine would ricochet through the global economy and financial markets.

One reason for its sharp rise: Investors decided they didn’t want to hold euros anymore given Europe’s proximity to the conflict. They dumped the bloc’s common currency and bought dollars instead.

“European markets are simply not attractive in this moment simply because of their geographical exposure to Ukraine and Russia,” ING strategist Francesco Pesole told me.

Remember: US stocks have been doing way better than European shares since Russia’s invasion because America’s economy is more insulated from the war and its consequences.

Natural gas prices in Europe hit record highs last week because of concerns about what will happen to energy exports from Russia. The United States, which is a major producer of energy itself, is getting slammed by higher costs, but to a lesser degree.

The US economy also looks healthy despite high inflation: 678,000 jobs were added in February, data released Friday showed, smashing forecasts.

Plus, the dollar got a boost after Federal Reserve Chair Jerome Powell said that the central bank aims to start raising interest rates later this month, even though the situation in Ukraine has clouded the outlook. Higher interest rates should help attract capital from abroad, especially if policymakers in Europe are forced to delay their own hikes for longer.

One more thing: In times of crisis, there’s no currency investors and policymakers would rather hold. The dollar accounted for 60% of global reserves in 2021.

“Markets and central banks want to hold the dollar because it’s a very liquid currency. It’s highly tradable,” Pesole said. “It’s backed by a very strong and solid economy.”

A stronger dollar can hurt profits for companies that earn money abroad, but a larger concern is how the dollar’s ascent will affect emerging economies, which often have to service their debts in dollars.

There’s already been some anxiety about whether Russia’s economic implosion will also cause investors to ditch riskier markets such as Brazil, Turkey or Mexico. The dollar’s climb could add pressure.

Watch this space: There’s been some chatter about whether Russia’s war in Ukraine could shake up the dollar’s dominance, strengthening Moscow’s resolve —…