Dollar index reaches two-year record high

The dollar index reached its highest level since March 2020 on Tuesday, with the greenback setting a 20-year high against the yen and testing a two-year high against the euro, supported by high government bond yields and expectations of an upbeat economic report. 

Slowing global economic growth

As a result of the weak economic outlook, uncertain geopolitical environment, and rising inflationary pressure, the World Bank has cut its global growth forecast for 2022 to 3.2% from 4.1% yesterday. The IMF will probably follow this move as it prepares for its meeting in Washington later this week. According to data released in January, the current estimate for 2022 is 4.4%, with Europe and Central Asia suffering the greatest consequences, primarily due to the Russian aggression in Ukraine and Covid restrictions.  

Weak PMI numbers in the eurozone or elsewhere could lead markets to downgrade expectations for the global economy. However,  US PMI is unlikely to be low, which should provide some contrast and could positively influence the dollar.

In the wake of yesterday's lower finish for US markets, with concerns that the downgrades seen yesterday could well be indicative of many more to come, we look set to have a negative start to the trading week in Europe following the long Easter weekend.

Diverse policies of central banks

On Tuesday, the benchmark US 10-year Treasury yield was at 2.8376, just shy of the three-year high of 2.884% reached on Monday. In comparison, the Bank of Japan intervened in order to keep the yield on Japanese 10-year government bonds at zero to no more than 0.25%.

At the European Central Bank's latest rate meeting last week, the bank did not seem in a hurry to increase rates, which put pressure on the euro.

Even though the ECB was keen to emphasize that the APP program would end by the end of Q3, there was no indication it would start quantitative tightening, putting it very much on a diverging path from other central banks.