The dollar falls as bank lifelines increase risk appetite

LONDON, March 17 (Reuters) – The dollar fell on Friday after top U.S. brokers, including the government and banks, threw a lifeline to a struggling regional lender to ease stress on the financial system, restoring some confidence to investors.

The rescue of First Republic Bank ( FRC.N ) in the United States on Thursday boosted risk appetite globally on Friday as worries about global banks eased, giving way to gains in the Australian and New Zealand dollars.

This week has revived memories of the 2008 financial crisis, when dozens of institutions failed or were bailed out with billions of dollars of government and central bank money.

Three smaller U.S. lenders have prompted regulators and other banks to step in to support them, while in Europe Credit Suisse ( CSGN.S ) became the first major global bank to receive a bailout from the Swiss central bank since the financial crisis, restoring investor confidence confidence and stemming a haemorrhage in customer deposits.

With measures in place to support any obviously struggling lenders and insurance from the likes of European Central Bank that the banking system in the Eurozone is robust, investors felt emboldened enough to sell the safe US dollar.

“As long as we don’t get any more negative headlines around the banking sector, or someone collapsing, we might just see a bit of risk, stocks heading higher, Treasuries giving up some of their gains and the dollar rolling in. a combination of a relief rally and a position squeeze ,” said TraderX strategist Michael Brown.

The US dollar index fell 0.21% to 104.07, led mainly by strength in the euro and yen.


Meanwhile, the European Central Bank (ECB) delivered a sharp 50 basis point interest rate hike at its policy meeting on Thursday.

ECB policymakers, led by President Christine Lagarde, sought to reassure investors that eurozone banks were resilient and that higher interest rates should, if anything, bolster their margins.

Had the ECB gone ahead with a smaller rate hike, or even no hike at all, given the turmoil in the banking sector this week, it could have seriously spooked investors and prompted a much bigger sell-off, analysts said.

Money markets are showing a much tamer outlook for interest rates than they have recently, but with core inflation still rising and proving stubborn, there would be little reason for the central bank to refrain from more rate hikes, analysts said.

In fact, ECB policymaker Peter Kazimir said on Friday that the bank needed to continue raising interest rates for this reason.

The euro was last up 0.3% against the dollar at $1.0646, and against the pound it rose 0.2% to 87.75 pence. So far this week, the euro has struggled to make headway against the dollar, losing 0.8% against the pound.

Sterling rose 0.12% to $1.2132, while the Swiss franc rose 0.35%. Earlier this week, the Swissie fell the most against the dollar in one day since 2015, when the central bank loosened its currency peg.

The Japanese yen, which also tends to benefit in times of extreme market volatility or stress, rose. It was last up 0.5% at 133.13 per dollar, set for a weekly gain of 1%.

Japan’s Finance Ministry, Financial Services Agency and Bank of Japan officials will meet on Friday night to discuss financial markets, the Nikkei newspaper reported, amid fears of the US banking crisis.

The Australian dollar, which often outperforms when investors are feeling upbeat, jumped 0.8% to $0.6707, while the kiwi rose 0.9% to $0.625.

The Federal Reserve’s monetary policy meeting next week is now taking center stage. Some investors hope the Fed may slow its aggressive rate hike campaign in an effort to ease stress on the financial sector.

Additional reporting by Rae Wee in Singapore; Editing by Kirsten Donovan

Our standards: Thomson Reuters Trust Principles.

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