Dollar slips as banking turmoil roils markets

Early recovery in European stocks runs out of steam as investor sentiment remains fragile

Passersby walk past an electronic board showing the exchange rate between US dollar/Japanese yen outside a brokerage, in Tokyo on Friday. - Reuters

By Reuters

Published: Fri 17 Mar 2023, 7:47 PM

The dollar fell on Friday as concerns of further turmoil in banking rattled equity markets and sent Treasury yields lower, while driving fears that a recession lies on the horizon.

An early recovery in European stocks ran out of steam as investor sentiment remained fragile after a week of turbulence sparked by the failure of Silicon Valley Bank and concerns over Credit Suisse despite a $54 billion lifeline for the bank.

The University of Michigan’s survey of consumer sentiment fell for the first time in four months even as readings on inflation expectations receded. The survey was mostly done before regulators shut SVB last week.

Preliminary results on economic conditions and consumer expectations also slid, the UMich surveys showed.

The dollar index, a measure of the dollar against six other currencies, fell 0.249 per cent, while the euro was up 0.26 per cent to $1.0633.

Contracts in the fed funds futures show a 74.5 per cent probability of the Federal Reserve will raise interest rates by a one-quarter percentage point next week, CME’s FedWatch Tool shows.

But expectations also show the Fed will be cutting rates by July as recession fears mount.

“There’s this belief that we’re heading towards a recession and depending on if the Fed makes a policy mistake, it can be a really severe one,” said Ed Moya, senior market analyst at OANDA in New York. “There is a wait and see approach as to what will happen with the U.S. economy,” he said. “Now we’re not debating a‘soft landing, no landing.’ We’re debating is it a mild or severe recession.”

The rescue of First Republic on Thursday initially boosted risk appetite on Friday as concerns about global banks eased, making way for surges in the Australian and New Zealand dollars.

Banking troubles revived memories of the 2008 financial crisis, in which dozens of institutions failed or were bailed out with billions of dollars of government and central bank money.

Three smaller U.S. lenders, including First Republic, have had regulators and other banks step in to prop them up, while in Europe, Credit Suisse became the first major global bank since the financial crisis to get an emergency lifeline. Sterling was last trading at $1.2144, up 0.31 per cent on the day, while the dollar fell 0.17 per cent against the Swiss franc. Earlier in the week, the franc plunged by the most against the dollar in a day since 2015, when the Swiss central bank loosened its currency peg.

The Japanese yen, which tends to benefit in times of extreme market volatility or stress, strengthened 1.28 per cent versus the greenback at 132.05 per dollar.

Japan’s Ministry of Finance, Financial Services Agency and Bank of Japan officials met on Friday evening to discuss financial markets. Masato Kanda, vice finance minister for international affairs, told reporters after the trilateral meeting that the government, the central bank and the banking watchdog would coordinate to ensure the stability of the financial system.

The Australian dollar, which often outperforms when investors are feeling optimistic, rose 0.44 per cent at $0.668.