Dollar stabilizes as banking crisis fears reduce

15 Mar 2023 , 07:53 AM

The dollar gained support on Wednesday in Asia as investors reduced their expectations of rate reduction in the United States as concern about a banking crisis subsided and another stubbornly high inflation reading came in.

The dollar was up about 0.2% against the euro and yen in early trade as the selling that had been occurring during the previous two sessions subsided. As a result, it reached 132.52 yen and $1.0729 in comparison to the US dollar.

As three U.S. banks failed in a matter of days, overnight, banking stocks recovered and bonds and interest rate futures gave back some of the significant gains they had made.

Even if they didn’t truly give any ground back, rallies in the Australian and New Zealand dollars, Scandinavian currencies, sterling, and other currencies appeared to lose pace.

A 25 basis point rate increase in the United States next week is now priced into interest rate futures at an 80% probability.

That is far less hawkish than a day ago when traders priced in a 50% chance of a hold and sharp cuts later in the year due to crisis fears, but it is also significantly more dovish than a week ago when markets priced a similar likelihood of a 50 bp raise.

Consumer prices in the United States rose significantly in February, maintaining the pressure on the Federal Reserve to limit price increases.

Sterling, up roughly 1% for the week, stabilized at $1.2149. While investors gathered their breath, the New Zealand dollar fell 0.2% to $0.6225 and the Australian dollar, which has gained 1.5% for the week so far, was unchanged at $0.6682.

Coupled with firmer stock markets and relative quiet in bonds, the developments show the immediate fears of contagion in the U.S. banking sector have decreased following the demise of Silicon Valley Bank last week.

But, the safe-haven Swiss franc’s impressive performance this week—up more than 3% in just five days—illustrates the high level of market anxiety.

Later on Wednesday, Chinese activity data is expected to be released, as is the outcome of Japan’s springtime wage fixing – which has the power to set the tone for pay and inflation in Japan for the rest of the year. 

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