Dollar falls as Fed rate hike expectations fall due to SVB collapse

NEW YORK/LONDON: The dollar fell on Monday as markets bet the Federal Reserve will be less aggressive in raising interest rates to curb inflation after US authorities stepped in to contain the fallout from the sudden collapse of Silicon Valley Bank.

President Joe Biden said the administration’s swift actions Sunday to ensure depositors can access their funds at SVB and Signature Bank should give Americans confidence that the U.S. banking system was safe.

The Fed announced on Sunday that it would make additional funding available through a new Bank Term Funding Program, which will offer loans of up to one year to depository institutions, backed by government bonds and other assets held by those institutions.

The dollar index, which measures the greenback against six other currencies, fell 0.46 percent as short-term Treasury yields fell.

The two-year bond yield fell 48.9 basis points to 4.099 percent, the biggest one-day drop since the financial crisis in 2008. The note was on course for its biggest three-day drop since the Black Monday crash of 1987.

“The financial crisis is cutting off monetary tightening. There’s a big shift in interest rate expectations,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

“Markets are already pricing in a cut again in Q4,” he said.

Fed funds futures also fell, with expectations that the Fed’s terminal rate fell to 4.14 percent in December from above 5 percent on Friday. Futures showed a 21 percent chance of no rate hike when policymakers wrap up a two-day meeting on March 22, according to CME’s FedWatch Tool.

CPI IN FOCUS

With widespread speculation about how the Fed will handle monetary policy and struggle to rein in inflation, the focus is on Tuesday’s release of the Consumer Price Index (CPI).

Goldman Sachs said it no longer expects the Fed to deliver a rate hike next week.

“There has been a radical change in interest rate expectations, and in that scenario the dollar has weakened,” says Niles Christensen, chief analyst at Nordea.

If worries about the US banking system are subdued and do not spread, “expectations for rate hikes should quickly revive,” he said.

Safe-haven currencies such as the Japanese yen and Swiss franc benefited from the fallout from the SVB.

The Japanese yen strengthened by 1.51 per cent. to 132.98 per dollar, while the dollar fell 1.12 per cent. against the Swiss franc at 0.911.

The euro, meanwhile, rose 0.62 percent to $1.0709. Earlier, it hit a near one-month high of $1.0737, ahead of the European Central Bank’s policy meeting on Thursday.

Expectations call for the ECB to deliver a 50 basis point hike, Christensen said.

“The question is how hawkish the ECB will be. We think they will signal that there will be more rate hikes going forward.”

Sterling traded at $1.2131, up 0.86 percent on the day. The Mexican peso, stronger than the dollar all year, lost 1.89 percent against the dollar at 18.85.

The Australian dollar jumped 1.41 percent to $0.667, on course for its biggest one-day percentage jump since February 7.

Bitcoin and other cryptocurrencies rallied over the weekend, with bitcoin rising 6.18 percent to $23,554.00.

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