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- The US Dollar traded near its four-month high level on Wednesday as global markets’ concerns waned investors’ risk appetite.
- The potential US tax hikes, shutdowns in Europe and the intensifying tensions between China and the West pushed greenback higher.
After hovering below recent highs on Tuesday, the US dollar reached a four-month high level early on Wednesday as global markets’ concerns dented investors’ risk appetite.
Early in the Asian session, the US Dollar Index (DXY) soared to a two-week high at 92.412, approaching a four-month high of 92.506 reached earlier this month. At the time of writing, DXY was trading at 92.57, with a rise of 0.25 per cent.
While the US dollar experienced gains, the euro edged below USD 1.18355 towards a four-month trough, trading as low as USD 1.18360 after an extension of lockdown in Germany.
Let us quickly browse through the key concerns that drove a surge in the greenback:
Third COVID-19 Wave in Europe
Several countries across Europe are re-imposing restrictions in order to control the third wave of COVID-19 infections. Countries, including Ukraine, Poland, Germany, and France, recently implemented stringent lockdown measures to curb the new wave of virus infections. These restrictions are set to last for at least many weeks.
The largest economy of Europe, Germany, has recently extended its lockdown measures till mid-April to push down the rate of coronavirus infections. The restrictions are set to run from 28 March 2021 until 18 April 2021. The nation will be under stricter lockdown over the Easter holiday period from 1 April to 5 April when shops will largely have to close.
Certain experts have issued warnings that the European nations’ decision to pause the usage of the AstraZeneca vaccine amid health concerns could further lead to a rise in the number of COVID-19 infections.
Potential Surge in US Tax Rates
Speculations are rife that the Biden administration will consider some tax hikes to fund the impending USD 3 trillion jobs and infrastructure spending proposals.
The administration is expected to increase the corporate tax rate from 21 per cent to 28 per cent, besides raising taxes on investment income. The officials are also expected to increase the global minimum tax and the tax on wealthy individuals.
The US dollar received an extra nudge after Janet Yellen, the US secretary of the Treasury, told lawmakers that future tax hikes will be required to fund infrastructure projects and additional public investments.
Besides potential US tax hikes and shutdowns in Europe, the intensifying tensions between China and the West sapped the risk appetite of investors.
Human rights sanctions imposed by the US, Europe, Canada and Britain on China, which fuelled retaliatory sanctions from Beijing, also increased market concerns while pushing the greenback higher. Marking the first coordinated Western action against Beijing, these Western countries recently imposed sanctions on Chinese officials for human rights abuses in Xinjiang.
China swiftly retaliated against the move, blacklisting ten individuals and four entities on the EU side, comprising European lawmakers, institutes, diplomats, and families.
Looking ahead, the US Dollar may continue to remain strong if Treasury yields bounce back higher and the global concerns continue to mount. However, a strong economic recovery driven by large-scale vaccination campaigns can turn the tables for the greenback.