USD: should you buy the dollar after last week's massive sell-off?

The US dollar has fallen last week despite the Federal Reserve raising interest rates. So should you buy or sell the greenback?

A strange week in the currency markets has just ended. It's strange because the US dollar did exactly the opposite of what it was supposed to do.

First, a war broke out in Europe three weeks ago. In times of uncertainty, the US dollar acts as a safe haven. This time, however, it partially did so - it gained against the Japanese yen but lost ground against the euro, the British pound or the Australian and New Zealand dollars.

Second, the Federal Reserve raised rates last Wednesday. Yet despite the Fed funds rate hike, the greenback has lost some of its gains since the start of the Russian-Ukrainian war.

So should you buy or sell the US dollar?

EUR/USD finds buyers below 1.10
The EUR/USD daily chart is worth watching. The exchange rate fell below 1.10, a pivotal level, and traded near 1.08, but has bounced back.

Somehow, the euro is finding bids below 1.10, despite the war in Eastern Europe. Perhaps the markets paid attention to Europe's solidarity with Ukraine and the fact that it was acting as a common block?

We don't know.

What we do know is that the euro appears to be above 1.10 and closed the week above the pivot level.

GBP/USD finds support at 1.30
Sterling has fallen even more against the US dollar in 2022 than the euro. Perhaps the fact that Brexit means a country facing the difficulties of a conflict not far away on its own?

The pound fell even though the Bank of England raised rates again. So now the current UK bank rate is 0.75%, struggling to keep up with the 5.6% inflation rate.

But perhaps that is why GBP/USD has rallied last week. The federal funds rate is only 0.25% in the US and inflation is 7.8% year-on-year. So the Fed rate hike this week did nothing to close the gap, so the pound outperformed the greenback.

AUD and NZD outperformed
The two currencies down are known to be closely correlated with the stock market. For example, the S&P 500 posted 4 consecutive days of gains above 1% - so both currencies also outperformed the greenback.

Overall, the weakness of the US dollar is likely to continue, despite the war in Ukraine. On the contrary, the markets are telling us that they are more rational than geopolitics would suggest.