Russia-Ukraine war has hit currencies hard. Here’s what analysts

LONDON — Currency markets have not escaped the steep losses and wild swings seen across other asset classes in recent weeks, and strategists are changing their game plans in light of Russia’s invasion of Ukraine.

The Deutsche Bank Currency Volatility Index climbed toward 10% on Tuesday morning in Europe, its highest level since April 2020, in the early stages of the Covid-19 pandemic.

The euro gained 0.4% against the dollar on Tuesday as some of the flight to safe-haven assets moderated, but was still down more than 4% against the greenback since the war began, as conflict intensified and focus switched to the looming threat to European energy supplies. The common currency slid more than 1% on Monday to conclude its largest three-day slide since March 2020.

Euro slide

In a note Friday, Goldman Sachs co-heads of global FX, rates and EM strategy, Zach Pandl and Kamakshya Trivedi, said the Wall Street giant’s constructive outlook on the euro was now off the table as long as military conflict continues.

Goldman’s models suggest that the downgrade to growth expectations across the euro zone subtracted around 1% from the EUR/USD currency pair last week, while an increase in the Europe-wide risk premium – the extra returns an investor can expect for taking on more risk – was worth almost 4%.

“Despite the sharp fall in EUR/USD, these models suggest the currency should be trading somewhat lower—around 1.07-1.08—given the moves in other market variables,” Pandl and Trivedi said.

Although they noted that estimates should be approached with caution, the models suggested that the euro is relatively strong against the Polish zloty (PLN), Swedish krona (SEK), U.S. dollar (USD), Hungarian forint (HUF) and British pound (GBP), while somewhat weak against the Swiss franc (CHF).

“In our view this suggests that EUR/USD and EUR/GBP are the most appropriate crosses for new hedges for Ukraine-related risks,” the strategists said, noting that EUR/CHF has been highly responsive to Ukraine developments thus far, owing to the Swiss franc’s status as a traditional safe haven.

However, the risk of the Swiss National Bank intervening to halt the currency’s appreciation has “likely risen now,” they added.

The military conflict cast broad uncertainty over the region’s macroeconomic outlook, but Pandl and Trivedi suggested that even if spillovers damage the euro area’s growth prospects, it would not necessarily result in sustained euro depreciation, as the European Central Bank may worry about the impact on inflation, while governments may respond to the crisis with fiscal easing.

“Moreover, if Euro Area growth holds up reasonably well and the ECB remains on…