During the Asian session on Tuesday (March 14), the US dollar index fluctuated within a narrow range and is currently trading around 103.67. The U.S. dollar weakened on Monday as bets the Federal Reserve would slow or even stop rate hikes to curb inflation after U.S. authorities moved to contain the fallout from the sudden collapse of a Silicon Valley bank.
President Biden said the administration’s swift action to ensure depositors have access to money from Silicon Valley Bank and Signature Bank should reassure Americans that the U.S. banking system is safe.
The Federal Reserve announced on Sunday that it will provide additional funding through a new bank term funding program that will provide loans to depository institutions for up to a year, collateralized by U.S. Treasury securities and other assets held by those institutions.
The greenback fell on Monday, with the dollar index , which measures the greenback against six major currencies, down 0.59% as short-dated U.S. Treasury yields plunged, undermining the main driver of the greenback’s recent strength.
The two-year U.S. Treasury yield plunged 57.2 basis points to 4.016%, its biggest one-day drop since the Black Monday stock market crash in 1987.
Shaun Osborne, chief currency strategist at Scotiabank, said: “Despite the rather significant financial risk nature of these developments over the past few days, we really haven’t seen a bid for the dollar from a risk-off or liquidity standpoint. . Much of this reflects a repricing of the Fed’s interest rate outlook, at least in the short term.”
Fed funds futures tumbled, with expectations for a peak Fed rate slipping to 3.84% from above 5% last week.
Several major banks, including Goldman Sachs, said they no longer expect the Fed to raise interest rates at the end of its two-day policy meeting on March 22.
Barclays said the latest bout of financial market jitters had created significant uncertainty for markets, with policymakers putting on hold on rate hikes at their meeting next week.
Interest rate futures are pricing in a 43.9 percent chance of no rate hike at next week’s meeting, about the same as a 50 basis point hike a week ago, according to the CME’s FedWatch tool.
As markets speculate on how the Federal Reserve will handle monetary policy and try to keep inflation in check, the focus turns to Tuesday’s consumer price index (CPI) data.
“If we get a higher-than-expected CPI number tomorrow, that’s a risk,” Osborne said. “We still have a very tight labor market, very high wage growth and above-target inflation, so the case for a rate hike remains very full.”
Safe-haven currencies such as the Japanese yen and the Swiss franc have benefited from Silicon Valley Bank’s influence.
It fell 1.26% to 133.33 on Monday, while USD/CHF fell 1.02% to 0.912.
It rose 0.79% to $1.0727 on Monday. Earlier, it touched a near one-month high of $1.0737. The European Central Bank holds a policy meeting on Thursday.
Niles Christensen, chief analyst at Nordea, said the ECB is expected to raise interest rates by 50 basis points.
“The question is how hawkish the ECB is. We think they will signal more rate hikes to come,” he said.
It closed at $1.2181 on Monday, up 1.27% on the day. The Mexican peso, which has been stronger than the greenback for the year, fell 2.32% to 18.94 per dollar.
It rose 1.37 percent to $0.667 on Monday, its biggest one-day percentage gain since Feb. 7.
Important economic data and risk events on Tuesday
Institutional view
BlackRock: Expect Fed to keep tightening despite pressure on banks
The investment research arm of BlackRock, the world‘s largest asset manager, said the Federal Reserve will still need to keep raising interest rates to fight inflation even as stress in the banking sector is undermining investor confidence and tightening financial conditions. The agency said that the current developments will not give the Fed a pause in raising interest rates, and that the environment is very different from 2008, when all levers of monetary policy were used to support the economy. Instead, by supporting the banking system today, the Fed can focus monetary policy on bringing inflation down to its 2% target. This view contrasts sharply with market expectations for the future path of monetary policy. Swaps market traders are now pricing in less than 25 basis points of further rate hikes this cycle, compared with fully pricing in a 50 basis point hike in March less than a week ago.
Nick Timiraos: SVB event will let Fed choose focus
“Fed megaphone” Nick Timiraos wrote that there is a saying that the Fed will raise interest rates until something goes wrong. Over the past year, it was a big surprise that rate hikes had no damaging impact, but that is no longer the case. A sharp sell-off in regional bank stocks on Monday following the collapse of Silicon Valley Bank (SVB) and Signature Bank threatened to push the Fed into a position it has been trying to avoid for the past year: addressing financial stability implications while fighting inflation. That scenario could force Fed Chairman Jerome Powell and his colleagues to pick and choose where the central bank needs to focus. According to CME data, after the Silicon Valley Bank incident, the interest rate futures market believes that the possibility of the Fed keeping interest rates unchanged at next week’s meeting is more than one-third.
Barclays: No longer expects the Fed to raise interest rates in March, but further rate hikes are still the baseline scenario
“With financial stability concerns at the forefront, we have adjusted our forecasts and now expect no rate hikes at the upcoming FOMC meeting, based on risk management considerations,” Barclays said. Economists are expecting a “pause” as they believe the turmoil could be contained in the coming weeks, especially after the government guarantees. The problem of failed banks is isolated rather than systemic in nature, and markets are likely to reflect this. But they don’t think the Fed’s rate hikes are over. “We still think the Fed will see further rate hikes as the baseline scenario.”
Royal Bank of Canada: It is expected that the overall CPI in the United States will further fall to 5.9% year-on-year
Analysts at RBC expect Tuesday’s U.S. inflation report to show that headline CPI growth fell to 5.9% year-on-year in February, down from 6.4% in January (the slowest since October 2021). Thanks in part to falling energy and food prices. Inflationary pressures on other goods and services have also edged down, although inflation has become stickier than expected in recent months. We expect February data to look better, with core CPI (excluding food and energy products) falling to 5.4% YoY from 5.6% in January. Strong U.S. labor market data point to strong economic growth in early 2023, while tougher inflation data suggest it may take longer for the Fed to return to its 2% target. That would give the Fed a reason to hike rates further.
BNP Paribas: ECB is expected to remain the most hawkish central bank in the G10
Analysts at BNP Paribas Markets 360 said that the European Central Bank is expected to raise interest rates by 50 basis points this week and may also raise interest rates by 50 basis points in May, which is expected to lead central banks in major developed markets to tighten monetary policy. At its upcoming meeting on Thursday, they expect the ECB to emphasize its resolve to rein in inflation and pledge to keep it high enough for long enough, analysts wrote in a note. Therefore, our current base case is that the ECB will raise interest rates by 50 basis points in May, and the ECB remains the most hawkish central bank in the G10.