The surging dollar lowers major currencies, gold and commodities

In response to Jerome Powell's announcement that interest rates will remain high for longer to address rising inflation, the US dollar surged to a 20-year high against a basket of currencies on Monday.

In the Asia trade, the dollar index reached a two-decade high of 109.44, pushing other major currencies to new lows and putting pressure on emerging market currencies. Dollar-yen trading reached a five-week high at 138.94, with bulls eyeing the 139.38 high set in July.

In the wake of these moves, the dollar has extended its gains made on Friday when Powell warned that there would be "some pain" for households and businesses as the Fed will have to take time before it can control inflation.

Powell clarified that there would not be a dovish pivot as some market participants had anticipated. During the course of this week, it is likely that the (US dollar index) will rise even higher toward 110 points, just as market participants continue to price in more aggressive tightening cycles by the major central banks in the near future.

ECB board member Isabel Schnabel, who warned over the weekend that central banks must now act forcefully to combat inflation, even if it dragged their economies into recession, drove home the tough-love message. This led to a sharp fall in Euribor futures, as markets priced in the possibility of rates rising 75 basis points next month.

There are two main takeaways from the report: taming inflation is the Fed's first priority, and the Fed's Funds Rate needs to reach a restrictive level of 3.5-4.0%.

US two-year yields surged nine basis points to 3.489%, the highest since late 2007 and far above the 10-year at 3.13%. Across Europe, yields had also risen, with double-digit increases in Italy, Spain, and Portugal.

Gold

Gold prices have seen a significant drop this year due to rising interest rates, despite some gains made by the yellow metal when the Russian-Ukrainian conflict started. The price of gold has dropped nearly 5% over the past 12 months and almost 20% from its peak in 2022.

The price of gold fell to its lowest level in a month on Monday following hawkish signals from the US Federal Reserve. Copper prices plunged following weak industrial data from China as well.

This week's focus will be on the Friday US payroll data, which could give the Fed even more space to raise rates if the number is substantial.

There were also losses in industrial metals due to the strengthening dollar. At the same time, Powell's economic warning caused doubts about metal demand in the market.

Oil

On Monday, crude oil prices rose 1% on the back of expectations that OPEC would cut output to support prices if needed.

A combination of these two factors, combined with the ongoing conflict in Libya and increasing demand in Europe amid soaring natural gas prices, helped offset a bleak outlook for US growth. Brent crude futures rose 16 cents, or 0.16%, to $101.15 a barrel, extending the increase of 4.4% seen last week. Despite a strong dollar restraint on broad commodity prices, there is a possibility that the oil markets will continue to see upward pressure due to undersupply.

It was speculated last week that OPEC might consider reducing its oil production if Tehran agrees to revive a nuclear deal with the United States. This would offset any increase in Iranian production.

A series of heavy clashes in Libya's capital last weekend that left 32 dead sparked fears that the country could slide into a full-blown conflict, causing a disruption in the supply of crude oil from the OPEC nation. Moreover, soaring gas prices, especially in Europe, are likely to result in gas-to-oil switching, which is a positive factor in the price increase in the coming months.