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Dollar Down as Recession Fears Grow over Fed’s Hawkish Stance

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© Reuters.

By Zhang Mengying

Investing.com – The dollar was down on Friday morning in Asia, and is set for its first weekly decline this month as investors’ recession fears grew after U.S. Federal Reserve signaled its resolution to tame inflation “unconditionally.”

The U.S. Dollar Index that tracks the greenback against a basket of other currencies edged down 0.17% to 104.25 by 1:28 AM ET (5:28 AM GMT).

The USD/JPY pair edged down 0.12% to 134.76.

The AUD/USD pair gained 0.34% to 0.6912, while NZD/USD pair jumped 0.46% to 0.6304.

The USD/CNY pair inched down 0.06% to 6.6947. while the GBP/USD pair edged up 0.16% to 1.2280.

The EUR/USD rose 0.19% to $1.0543, after tumbling 0.44% overnight over disappointing German and French purchasing managers’ index figures, which spurred expectations that the European Central Bank (ECB) might deliver less aggressive monetary policies.

“The market has started to trim a reasonable amount out of pricing for the next couple of ECB meetings,” National Australia Bank (OTC:NABZY) interest-rate strategist Ken Crompton said, according to Reuters.

“There have been a couple of factors there which have really added up, which have really started to question how far the ECB will be able to get into its tightening.”

Recession fears over tightening monetary policy also lingered in the state. U.S. manufacturing purchasing managers index (PMI) released on Thursday was 52.4 in June, lower than the 56 predicted by Investing.com while 57 was recorded in May, which indicates slower factory activity in June.

Fed Chair Jerome Powell stressed that Fed’s inflation fight is “unconditional” in his second day of testimony to Congress, while Fed Governor Michelle Bowman said on the same day that she supports another 75-basis points interest rate hike in July, followed by a few more half-point hikes.

Forex

The ‘Big Package’: How Russia was driven to default

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© Reuters. FILE PHOTO: European Commission President Ursula von der Leyen arrives for the European Union leaders summit, as EU’s leaders attempt to agree on Russian oil sanctions in response to Russia’s invasion of Ukraine, in Brussels, Belgium May 30, 2022. REUTERS

By Marc Jones

LONDON (Reuters) – Russia’s first major international debt default in over a century, which Washington said became a fact on Monday, follows months of co-ordinated Western sanctions that left Moscow with cash but no access to the international financial network.

Below is a summary of the key moments that have led up to this point.

THE “BIG PACKAGE”

At around 11.30 p.m. (2230 GMT) on Feb. 25, the day after Russian troops entered Ukraine, European Union’s experts in Brussels said a set of sanctions they had worked on for days, or the “Big Package” as they called it, was ready.

Just before midnight, the European Commission announced https://www.consilium.europa.eu/en/press/press-releases/2022/02/25/russia-s-military-aggression-against-ukraine-eu-imposes-sanctions-against-president-putin-and-foreign-minister-lavrov-and-adopts-wide-ranging-individual-and-economic-sanctions the measures.

While emergency Group of Seven and EU meetings earlier made clear a response was coming, the package named Vladimir Putin and his top diplomat Sergei Lavrov personally, and, as it later became clear, froze some $300 billion of the Russian central bank’s reserves.

“That was really the moment when we said, okay, well we’ve done it,” one European source told Reuters. “That was, I think, a very pivotal moment for a lot of people around a table.”

Graphic: EU’s Von der Leyen lays out Russia sanctions- https://fingfx.thomsonreuters.com/gfx/mkt/dwvkrmloapm/Pasted%20image%201656346091349.png

SWIFT ACTION

Days later, on March 2, the EU struck again by banning seven Russian banks from SWIFT, an international financial messaging system crucial for cross-border transactions.

Booting Russian lenders from SWIFT had long been considered a ‘nuclear option,’ but the invasion put it on the table and when the EU decided to activate it, those at SWIFT headquarters just outside Brussels were ready.

The only question was how long they had to implement the move, “five days or five minutes?” another source said. In the end is was 10-12 days.

FIRST CUTS, BUT NOT THE DEEPEST

Credit rating agency, S&P Global (NYSE:SPGI), already stripped Moscow of its coveted investment grade rating on Feb. 26 and Russian bonds were slumping, but a heavier blow followed on March 15, when the EU told top credit agencies to stop rating Russian dept or risk losing their licenses to operate in the bloc.

“We were caught flat-footed, certainly we were not given any advanced warning,” one senior rating agency analyst said. “Basically the question was, does this mean we can’t rate Russia any more?” It turned out the answer was yes.

Graphic: Driven to default Driven to default- https://graphics.reuters.com/UKRAINE-CRISIS/RUSSIA-BONDS/mopanryzgva/chart.png

DEFAULT DEADLINE ONE

With so many hurdles being erected, expectations built that Russia would default on its first post-sanctions’ bond payments either on March 16, or a month later at the end of a 30-day “grace period.”

However, a special “waiver” in the U.S. sanctions granted by the Treasury’s Office of Foreign Assets Control allowed payments to go through.

UNINTENDED CONSEQUENCES

On April 8, a week before the EU ban on Russian ratings was due to come into force, S&P declared Russia in “selective default” after Moscow said it planned to make upcoming bond payments in roubles rather than dollars, their issue currency.

On May 3 though, shortly before the payment was due, the Kremlin U-turned and paid in dollars.

SHOCK TO THE SYSTEM

Days later, Russia had stumbled, though.

On May 11, sharp-eyed creditors spotted that Moscow had failed to add $1.9 million of extra interest that had built up on bonds that only got paid in their grace periods rather than on time. They contacted the clearing house Euroclear and then bond market equivalent of an insurance payment arbiter – the Credit Derivative Determinations Committee https://www.cdsdeterminationscommittees.org/cds/the-russian-federation which ruled that a “credit event” had happened.

The sum was too small to trigger default clauses in all of Russia’s international bonds, but it did mean some investors expected to receive default insurance payments.

But when the U.S. Treasury clarified on its website that buying Russian bonds on the open, or ‘secondary’ market, was banned, that credit default swap (CDS) insurance process had to be halted as it was no longer clear what to do with the bonds involved.

“It is a bit like if your house burns down and the insurance company turns around and claims it was the wrong kind of fire,” said Joe Delvaux, emerging markets distressed debt portfolio manager at Europe’s largest fund manager Amundi. “The reality is that these sanctions are a shock to the system.”

INTENDED CONSEQUENCES

The step that made Russia’s default unavoidable though was Washington’s May 24 decision to let the waiver that had allowed U.S. bondholders to receive Russia’s payments, expire.

A week later, the EU also sanctioned Russia’s domestic paying agent, its National Settlement Depository (NSD), which it had been using to make the payments.

Moscow has blamed the West for forcing an “artificial default”., with its finance minister Anton Siluanov calling the situation a “farce.”

However, veteran global policymakers involved in the process say they sanctions are unprecedented but fully justified.

“They were very significant actions that responded to the magnitude of the actions that Russia undertook,” Agustin Carstens, the head of the world’s central bank umbrella body, the Bank for International Settlements, said.

Graphic: Biden stresses power of U.S. sanctions- https://fingfx.thomsonreuters.com/gfx/mkt/zjvqkloyovx/Pasted%20image%201656321187075.png

(This story refiles to fixe typo in 1st paragraph).

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Forex

The “Big Package”: How Russia was driven to default

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on


© Reuters. FILE PHOTO: European Commission President Ursula von der Leyen arrives for the European Union leaders summit, as EU’s leaders attempt to agree on Russian oil sanctions in response to Russia’s invasion of Ukraine, in Brussels, Belgium May 30, 2022. REUTERS

By Marc Jones

LONDON (Reuters) – Russia’s first major international debt default in over a century, which Washington said became a fact on Monday, follows months of co-ordinated Western sanctions that left Moscow with cash but o access to the international financial network.

Below is a summary of the key moments that have led up to this point.

THE “BIG PACKAGE”

At around 11.30 p.m. (2230 GMT) on Feb. 25, the day after Russian troops entered Ukraine, European Union’s experts in Brussels said a set of sanctions they had worked on for days, or the “Big Package” as they called it, was ready.

Just before midnight, the European Commission announced https://www.consilium.europa.eu/en/press/press-releases/2022/02/25/russia-s-military-aggression-against-ukraine-eu-imposes-sanctions-against-president-putin-and-foreign-minister-lavrov-and-adopts-wide-ranging-individual-and-economic-sanctions the measures.

While emergency Group of Seven and EU meetings earlier made clear a response was coming, the package named Vladimir Putin and his to diplomat Sergey Lavrov personally, and, as it later became clear, froze some $300 billion of the Russian central bank’s reserves.

“That was really the moment when we said, okay, well we’ve done it,” one European source told Reuters. “That was, I think, a very pivotal moment for a lot of people around a table.”

EU’s Von der Leyen lays out Russia sanctions https://fingfx.thomsonreuters.com/gfx/mkt/dwvkrmloapm/Pasted%20image%201656346091349.png

SWIFT ACTION

Days later, on March 2, the EU struck again https://www.consilium.europa.eu/en/press/press-releases/2022/03/02/russia-s-military-aggression-against-ukraine-eu-bans-certain-russian-banks-from-swift-system-and-introduces-further-restrictions by banning seven Russian banks from SWIFT, an international financial messaging system crucial for cross-border transactions.

Booting Russian lenders from SWIFT had long been considered a ‘nuclear option,’ but the invasion put it on the table and when the EU decided to activate it, those at SWIFT headquarters just outside Brussels were ready.

The only question was how long they had to implement the move, “five days or five minutes?” another source said. In the end is was 10-12 days.

FIRST CUTS, BUT NOT THE DEEPEST

Credit rating agency, S&P Global (NYSE:SPGI), already stripped Moscow of its coveted investment grade rating on Feb. 26 and Russian bonds were slumping, but a heavier blow followed on March 15, when the EU told top credit agencies to stop rating Russian dept or risk losing their licenses to operate in the bloc.

“We were caught flat-footed, certainly we were not given any advanced warning,” one senior rating agency analyst said. “Basically the question was, does this mean we can’t rate Russia any more?” It turned out the answer was yes.

Driven to default Driven to default https://graphics.reuters.com/UKRAINE-CRISIS/RUSSIA-BONDS/mopanryzgva/chart.png

DEFAULT DEADLINE ONE

With so many hurdles being erected, expectations built that Russia would default on its first post-sanctions’ bond payments either on March 16, or a month later at the end of a 30-day “grace period.”

However, a special “waiver” in the U.S. sanctions granted by the Treasury’s Office of Foreign Assets Control allowed payments to go through.

UNINTENDED CONSEQUENCES

On April 8, a week before EU ban on Russian ratings was due to come into force, S&P declared Russia in “selective default” after Moscow said it planned to make upcoming bond payments in roubles rather than dollars, their issue currency.

On May 3 though, shortly before the payment was due, the Kremlin U-turned and paid in dollars.

SHOCK TO THE SYSTEM

Days later, Russia had stumbled, though.

On May 11, sharp-eyed creditors spotted that Moscow had failed to add $1.9 million of extra interest that had built up on bonds that only got paid in their grace periods rather than on time. They contacted the clearing house Euroclear and then bond market equivalent of an insurance payment arbiter – the Credit Derivative Determinations Committee https://www.cdsdeterminationscommittees.org/cds/the-russian-federation which ruled that a “credit event” had happened.

The sum was too small to trigger default clauses in all of Russia’s international bonds, but it did mean some investors expected to receive default insurance payments.

But when the U.S. Treasury clarified on its website that buying Russian bonds on the open, or ‘secondary’ market, was banned, that CDS insurance process had to be halted as it was no longer clear what to do with the bonds involved.

“It is a bit like if your house burns down and the insurance company turns around and claims it was the wrong kind of fire,” said Joe Delvaux, emerging markets distressed debt portfolio manager at Europe’s largest fund manager Amundi. “The reality is that these sanctions are a shock to the system.”

INTENDED CONSEQUENCES

The step that made Russia’s default unavoidable though was Washington’s May 24 decision to let the waiver that had allowed U.S. bondholders receive Russia’s payments, expire.

A week later, the EU also sanctioned Russia’s domestic paying agent, its National Settlement Depository (NSD), which it had been using to make the payments.

Moscow has blamed the West for forcing an “artificial default”., with its finance minister Anton Siluanov calling the situation a “farce.”

However, veteran global policymakers involved in the process say they sanctions are unprecedented but fully justified.

“They were very significant actions that responded to the magnitude of the actions that Russia undertook,” Agustin Carstens, the head of the world’s central bank umbrella body, the Bank for International Settlements, said.

Biden stresses power of U.S. sanctions https://fingfx.thomsonreuters.com/gfx/mkt/zjvqkloyovx/Pasted%20image%201656321187075.png

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Forex

Dollar Edges Lower as Investors Weigh Powell Testimony

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© Reuters

By Scott Kanowsky  

Investing.com — The U.S. dollar slipped slightly on Friday, as investors remained cautious of the impact of tighter central bank policies around the world aimed at curbing soaring inflation.

As of 02:35 AM EST (0635 GMT), the U.S. dollar index – which tracks the greenback against a basket of six currencies – was marginally in the red, down 0.16% to 104.27. The index is trading below a two-decade peak of 105.79 reached on June 15 following a 75 basis point interest rate hike by the Federal Reserve.

The dollar is moving lower from that elevated level due to concerns that such aggressive monetary tightening may end up sparking a recession.

Fed Chair Jerome Powell warned in a testimony on Capitol Hill earlier this week that while it does not intend to cause a wider slowdown, “it’s certainly a possibility” despite his confidence that the U.S. economy will be able to withstand a sharp rise in borrowing costs. On Thursday, Powell added that the Fed has an “unconditional” commitment to fighting inflation.

The U.S. 10-year Treasury yield eased to 3.087% in the wake of Powell’s comments.

Meanwhile, GBP/USD remained firm, edging slightly higher by 0.05% to $1.22, following data on Friday that showed U.K. retail sales volumes declined by 0.5% in May, but were above analyst estimates.

Elsewhere, EUR/USD rose 0.19% to $1.05 ahead of statements from European Central Bank speakers later today and business confidence data in Germany.

USD/JPY was down 0.11% to trade at ¥134.79 after Japanese inflation came in above the Bank of Japan’s 2% target, casting some doubt on the bank’s loose monetary policy stance.

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