The US dollar regained some of its strength on Tuesday, although it remained near a five-week low as traders tiptoed back into riskier assets after UBS’ state-backed acquisition of Credit Suisse calmed fears of a systemic banking crisis. Investors struggled to determine the scale of the fallout from a sector hit that began with Silicon Valley Bank’s collapse, leading to a cap on risk appetite and providing some support to the safe-haven dollar.
In an attempt to ease market concerns and stem widespread contagion, the Federal Reserve announced that it would offer daily currency swaps to ensure banks in Canada, Britain, Japan, Switzerland, and the eurozone would have the dollars needed to operate. Lower US rate expectations also contributed to downward pressure on the dollar ahead of the Federal Reserve’s two-day policy meeting commencing later on Tuesday.
Market analysts predict a 73.8% chance of a 25 basis point rate hike, with a 26.2% chance that the Fed will stand pat when it announces its monetary policy decision on Wednesday, according to the CME FedWatch tool. The Reserve Bank of New Zealand stated on Tuesday that it saw no immediate need to request the reinstatement of a US dollar swap line that expired in 2021.
FOREX-Dollar Languishes as Credit Suisse Rescue Eases Bank Crisis Fears
On Tuesday, the US dollar regained some of its strength, though it remained near a five-week low as traders gradually returned to riskier assets after UBS’ state-backed acquisition of Credit Suisse calmed concerns over a systemic banking crisis. Despite the positive news, market sentiment remained fragile as investors struggled to determine the scale of the fallout from a sector hit that began with Silicon Valley Bank’s collapse. This led to a cap on risk appetite, providing some support to the safe-haven dollar.
Sterling rose slightly, by 0.02% to $1.2280, while the euro stabilized at $1.0722. The Aussie dollar fell by 0.22% to $0.6703. News of UBS’ planned takeover of Credit Suisse on Sunday, a shotgun merger engineered by Swiss authorities, spurred a small risk-on rally on Monday as worries over market-shaking turmoil across global banks waned.
According to Alvin Tan, Head of Asia FX Strategy at RBC Capital Markets, “markets remain nervous, but the rapidity of policymakers’ response to the evolving banking sector risks is heartening.” In a further attempt to ease market concerns and stem widespread contagion, the Federal Reserve announced on Sunday that it would offer daily currency swaps to ensure banks in Canada, Britain, Japan, Switzerland, and the eurozone would have the dollars needed to operate.
Carol Kong, a currency strategist at Commonwealth Bank of Australia (CBA), noted that there has been “pretty modest demand for US dollars at the Fed swap lines, so that is a positive sign in and of itself.” However, “there continues to be some signs of stress in funding markets… so currencies will continue to be pretty cautious,” she added.
The US dollar index, which measures the greenback against a basket of currencies, fell by 0.04% to 103.30, and the dollar slipped 0.12% to 131.15 against the Japanese yen. Lower US rate expectations also contributed to downward pressure on the dollar ahead of the Federal Reserve’s two-day policy meeting commencing later on Tuesday.
Market analysts predict a 73.8% chance of a 25 basis point rate hike, with a 26.2% chance that the Fed will stand pat when it announces its monetary policy decision on Wednesday, according to the CME FedWatch tool. Kong believes that “it will be important for Fed Chair (Jerome) Powell to give reassurance to market participants that the US financial system, at least, is very resilient and robust.”
Elsewhere, the kiwi fell by 0.16% to $0.6237. The Reserve Bank of New Zealand stated on Tuesday that it saw no immediate need to request the reinstatement of a US dollar swap line that expired in 2021.
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