NEW YORK/LONDON, March 13 (Reuters) – The dollar fell on Monday as markets bet the Federal Reserve will be less aggressive in raising interest rates to curb inflation after U.S. authorities stepped in to contain the fallout from Silicon The sudden collapse of Valley Bank (SIVB.O).
President Joe Biden said the administration’s swift actions Sunday to ensure depositors can access their funds in SVB ( SIVB.O ) and Signature Bank ( SBNY.O ) 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% as short-term Treasury yields fell.
The two-year bond yield fell 48.9 basis points to 4.099%, the biggest one-day drop since the financial crisis of 2008. The note was on pace for its biggest three-day drop since the Black Monday crash of 1987.
See 2 more stories
“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% in December from above 5% on Friday. Futures showed a 21% 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 1.51% to 132.98 per dollar, while the greenback fell 1.12% against the Swiss franc at 0.911.
The euro, meanwhile, rose 0.62% 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 is trading at $1.2131, up 0.86% on the day. The Mexican peso, stronger than the dollar all year, lost 1.89% against the dollar at 18.85.
The Australian dollar jumped 1.41% to $0.667, on track for its biggest one-day percentage jump since February 7.
Bitcoin and other cryptocurrencies rallied over the weekend, with bitcoin rising 6.18% to $23,554.00.
Reporting by Herbert Lash, additional reporting by Samuel Indyk in London, Ankur Banerjee in Singapore; Editing by Stephen Coates, Jacqueline Wong, Kirsten Donovan, Sharon Singleton and Alex Richardson
Our standards: Thomson Reuters Trust Principles.