At the beginning of the Asian market on Wednesday (March 29), the U.S. dollar index fluctuated within a narrow range and is currently trading around 102.49, which is close to the lowest closing price in the past two months set overnight. On Tuesday, the U.S. dollar index continued its decline, hitting a minimum of 102.38, a new low in the past three trading days, and closing at 102.43, the lowest closing price since February 3, a drop of about 0.42%. Concerns eased as investors resumed their appetite for riskier currencies and the safe-haven dollar sold off.
Investors were comforted by First Citizens Bank’s agreement to buy all deposits and loans of the failed Silicon Valley bank and the absence of further cracks in the global banking sector in recent sessions.
It fell 0.42% on Tuesday to close at 102.43, not far from a near seven-week low of 101.91 hit last Thursday.
considered to be a proxy for risk appetite liquidityIt jumped 0.9 percent to close at $0.6707 on Tuesday, boosted by better-than-expected retail sales data.
TraderX strategist Michael Brown said: “Tuesday’s trading is skewed positive. I think it’s ‘no news is good news’ right now when it comes to the turmoil in the banking sector, and that helps calm some nerves.”
It climbed 0.43% on Tuesday and hit a high of 1.0848 in the session, rising for two consecutive trading days. The rise in government bond yields in the euro zone also provided support for the exchange rate.
Data on Tuesday showing the U.S. goods trade deficit widened slightly in February and exports fell, which could make trade a drag on economic growth in the first quarter, provided little support for the dollar.
The yen also rose despite traditionally being a safe-haven asset, with analysts pointing to a pick-up in yen flows ahead of the end of Japan’s fiscal year on Friday.
As the yen rises,It fell as low as 130.415 yen, and fell 0.55% in late trading to close at 130.81. The dollar jumped 0.63% against the yen in the previous session, tracking sharp gains in U.S. Treasury yields.
Analysts said Japanese companies may be selling foreign bonds to bolster their balance sheets.
“At this time of year — at the end of Japan’s fiscal year — I think there is some money coming back to Japan,” said Bart Wakabayashi, a manager at State Street Bank in Tokyo.
“If that’s the case, it’s basically a one-off and then we’re going back to fundamentals, which is basically following yield.”
TraderX’s Brown warned that the dollar’s recent sell-off may have been overdone – it has slumped more than 3% against a basket of currencies from March highs.
“Markets appear to have gone too far, too fast in their dovish reassessment of the FOMC outlook, especially with policymakers adamant that there will be no rate cuts this year,” Brown said.
“If the banking crisis eases, which appears to be easing, that should give the Fed more courage to maintain their hawkish stance and thus boost the dollar,” he said.
Last week, the Federal Open Market Committee raised interest rates by 25 basis points, as expected, but took a cautious stance on the outlook due to turmoil in the banking sector. Chairman Jerome Powell, however, left room for further rate hikes if necessary.
It rose 0.51% on Tuesday, hitting 1.2348 at one point during the session, a new high since February 3, and closing at 1.2341. The Bank of England said the UK was not facing pressure related to the troubles of Silicon Valley Bank and Credit Suisse.
Important economic data and risk events on Wednesday
Institutional view
Citi: Fed still underestimates inflation in 2023
Citi said the Fed still underestimated the persistence of inflation this year, especially in the short run. Citi economists said the Fed’s updated summary of economic forecasts released last week showed only a very modest upward revision to the 2023 inflation forecast, with core PCE inflation raised to 3.6% from 3.5%. But Citi expects core PCE inflation to reach 4.3% by the end of the year, with strong inflation in the coming months forcing the central bank to keep raising rates. One of the factors that Citi sees as rising inflation is the stronger-than-expected PMI data for March.
ING: GBP/USD may extend gains due to disagreement between Bank of England and Fed
Sterling could extend its gains against the dollar as signals from the Bank of England and the Federal Reserve diverge on future monetary policy, ING said. The bank’s analyst Francisco said that Bank of England Governor Bailey sounded “relatively hawkish” in his speech on Monday. He said that the British banking system is in good shape and further interest rate hikes are possible if inflationary pressures persist. By contrast, the Fed is signaling more cautiously about future policy at a time when the banking sector is under pressure. With BoE rate expectations now supported, we think GBP/USD can head towards the key 1.2426 (Dec high) and 1.2500 resistance levels soon against the backdrop of USD weakness and policy divergence.
Oxford Economics: A repeat of the financial crisis is unlikely
Tamara Basic Vasiljev, senior economist at Oxford Economics, said in a report that while there are significant similarities between the current banking crisis and the triggers of the 2008 global financial crisis, household finances are currently stronger and these key differences making the crisis less likely to repeat itself. Home prices that soared during the coronavirus pandemic are now falling and mortgage rates are reversing after rising to unprecedented levels. In addition, American households are now in much better financial shape, with lower loan-to-value and debt-to-income ratios and much healthier savings. This cushions the possible shock to the real estate market to a certain extent, which was not available during the 2008 financial crisis. And now the labor market looks more resilient.
Goldman Sachs: Fears of banking stress appear to have faded
Concerns about stress in the banking sector appear to have receded since mid-March, Goldman Sachs economists said in a note. If the data continues to move in this direction, it could open up room for the dollar to recover as the recent repricing of rate cuts looks overdone.
Commerzbank: BoE’s inflation outlook poses risk to pound
Sterling could weaken as the Bank of England’s expectations that inflation will ease sharply this year may be too optimistic, You-Na Park-Heger, FX analyst at Commerzbank, said in a note. The Bank of England’s inflation outlook suggests that its rate hike cycle may soon be over. However, inflation may be more stubborn than the Bank of England expected, as the Bank of England acknowledged that the economy and labor market will be stronger than previously expected. Commerzbank said the Bank of England’s monetary policy could be behind the curve due to the risk that inflation may not ease quickly, doubting the future direction of the pound, although it expects the pound to weaken in the coming months.
Commerzbank: Dollar likely to remain weak even if key inflation gauge beats forecasts
Commerzbank said the dollar could continue to struggle even if data this week on the Fed’s preferred gauge of underlying inflation beat expectations. The bank’s foreign exchange analyst You Na Park Heger said in a note that as nervousness in financial markets continues, even if Friday’s U.S. core personal consumption expenditures price index for February is higher than expected, the Fed may be more cautious. Leaning towards a more balanced form of communication means the current environment for the dollar may still be tough.