Dollar Starts April with High Volatility

After soaring on the back of the sudden OPEC decision, the US dollar exchange rate plummeted along with weakening expectations of interest rates.

The US dollar index (DXY) briefly soared to a daily high above the 103.00 thresholds in the Asian session but immediately fell back to the 102.00 range. As of the beginning of the New York session on Monday (April 3), the Dixie was still stuck in a narrow range near its daily low. Fluctuations occurred due to the ebb and flow of expectations for the Fed's interest rates.

Several market observers believe that the strength of the US dollar at the beginning of the month is related to the surprising decision of OPEC+. The world's largest cartel suddenly decided to cut oil output quotas by more than one million barrels per day, causing oil prices to soar more than 6 percent quickly. Market volatility like this tends to benefit the US dollar exchange rate.

Rising oil prices can boost inflation, thus increasing the chances of the Fed raising interest rates. Due to these speculations, US Treasury 10Y bond yields surged to above 3.5000% again.

Unfortunately, speculation of rising inflation and interest rates did not last long. At the time of writing, US Treasury 10Y yields have dropped back to around 3.4100%.

The US dollar exchange rate also weakened. This is because oil prices and other energy commodities do not directly affect core inflation, the main policy reference for central banks worldwide.

Karl Schamotta, chief market strategist at Corpay in Toronto said that after the oil news, markets have pivoted back toward the deeper disinflationary fundamentals that are likely to drive the monetary policy outlook. "Central banks are thought likely to stay focused on growth, employment and core inflation measures, which reflect energy prices at a long lag, so market-implied odds on rate cuts are reverting toward pre-production cut levels. Rate differentials are correspondingly turning back against the dollar."