Dollar faces selling pressures as US bond yields plummet

23 Mar 2023 , 09:34 AM

On Thursday, the dollar faced pressure around seven-week lows as U.S. bond yields plunged as the Federal Reserve appeared to be close to abandoning interest rate hikes.

The Fed increased its benchmark funds rate by 25 basis points, as anticipated, but opted to use the phrase ‘some additional increases’ rather than ‘ongoing hikes’ as it waits to see how the economy is affected by the economy’s shaky confidence in banks.

Futures only predict an equal possibility of one additional raise. In contrast, markets in Europe expect another 50 bp or so to rise, and the difference caused the euro to soar.

When U.S. Treasury Secretary Janet Yellen informed Congress that she hasn’t thought about or discussed blanket insurance for deposits, she sparked another round of bank stock selling and stability concerns, which helped the dollar partially recover some of its losses.

The euro rose as much as 1.3% to $1.0912, its highest level since early February, but by the Asian morning, it had fallen back to $1.0872.

The unexpected increase in British inflation, which brought it to an alarming 10.4% and put pressure on the Bank of England to hike rates and sound hawkish at its meeting later in the day, also sent the value of the pound to a seven-week high.

The dollar/yen exchange rate dropped by 0.7% overnight and was somewhat lower in the Asian morning at 131.19. On Wednesday, two-year Treasury yields decreased by 22 bps.

Following a run on Silicon Valley Bank two weeks ago and the abrupt collapse of Credit Suisse, financial markets have been rocked by waning confidence in banks worldwide.

The risk-averse Australian dollar abruptly pulled down from a two-week high of $0.6759 to close Thursday morning at $0.6707.

Although it lost overnight gains, the New Zealand dollar was steady in early trade at $0.6238. After reaching a high of $1.2334 overnight, sterling was acquired at $1.2282. Markets have factored in a 25 bp increase from the BoE.

The main focus of attention on the banking front is currently on regional institutions in the United States, where concern over a contagion run on deposits is still high.

Deposit flows have stabilized during the past week, according to Fed Chair Jerome Powell, and smaller lenders indicated they found some solace in Yellen’s comments that deposit insurance would be taken into consideration if there was a risk of contagion.

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