Safe haven currencies appreciate in value amidst rising economic uncertainty

16 Mar 2023 , 08:21 AM

After contagion from the collapse of American bank Silicon Valley Bank crossed the Atlantic to hit Swiss bank Credit Suisse, safe-haven currencies like the U.S. dollar and the yen arere in demand on Thursday amid fresh concerns about a worldwide financial crisis.

After the announcement by its largest shareholder that it would be unable to continue supporting the bank, Credit Suisse’s shares on Wednesday fell as much as 30%, dealing another blow to investor confidence in the banking industry.

In a first for a central bank, Credit Suisse said on Thursday morning in early Asian trade that it will borrow up to 50 billion Swiss francs ($54 billion) from the bank as a lifeline to the struggling lender.

Due to growing concerns that the recent stress spreading across banks in the U.S. and Europe may be a sign of a far larger systemic crisis, traders flocked to traditional safe haven currencies, driving up the value of the dollar and the Japanese yen.

The yen increased by nearly 0.5% in early Asian trading and last traded at 132.73 per dollar, adding to its 0.6% increase on Wednesday.

The dollar’s 2.15% gain against the Swiss franc in the previous session, which was the highest daily gain since 2015, was partially offset, but the Swiss franc was still stuck close to a one-week low.

The U.S. dollar index was last trading 0.07% lower at 104.58 when measured against a basket of currencies, after increasing by about 1% the previous day.

After SVB’s demise last week, Credit Suisse became the latest victim of a confidence crisis as it struggles to recover from a spate of scandals that have eroded the trust of investors and clients.

The failure of SVB on Friday, followed by the failure of Signature Bank two days later, compelled American President Joe Biden to hurriedly issue statements assuring the safety of the financial system and spurred emergency U.S. measures allowing banks access to more money.

Investors are still on edge as they wait for more information on the potential scope of the impact, and so far, no amount of government intervention has been able to allay their growing concerns.

The focus now shifts to how central banks will decide how much higher to raise interest rates in the future in order to contain inflation without causing a shakeout of the financial system.

Later on Thursday, the European Central Bank will hold a meeting and then decide on an interest rate. Bets made by traders on a rate increase of 50 basis points have quickly lost their value as worries about the state of Europe’s banking sector have been stoked by the collapse in Credit Suisse shares.

The risk-averse Australian and New Zealand dollars, which both lost close to 1% on Wednesday, were battling to gain ground elsewhere.

The kiwi was last down 0.26% to $0.6172 as a result of Thursday’s dismal economic statistics, which indicated that New Zealand’s economy contracted in the fourth quarter. The Australian dollar was last up 0.19% at $0.6634.

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