SINGAPORE – The US dollar languished near a multi-week low on Tuesday as fears of a broader systemic crisis following the sudden collapse of Silicon Valley Bank (SVB) left traders speculating that the Federal Reserve could pause its aggressive rate hiking cycle.
The Fed’s rate hikes and expectations of how much higher US rates would go have been a huge driver of the dollar’s rally.
The fallout from SVB has sent traders scaling back their bets on how much further the Fed will continue raising interest rates, sparking a sharp rally in Fed funds futures and sending the United States dollar tumbling.
The greenback was nursing deep losses from the previous session in early Asia trade, and was last marginally higher against the Japanese yen at 133.42, having slid 1.4 per cent on Monday.
Against the Singapore dollar, the US currency dipped 0.3 per cent to 1.3462 on Monday. It pared that loss on Tuesday, edging up 0.15 per cent to 1.3482 as at 11.11am.
Similarly, the pound edged 0.19 per cent lower to US$1.2159, although it remained near its one-month peak of US$1.2200 hit in the previous session. The euro fell 0.09 per cent to US$1.0719, but was likewise not far from Monday’s one-month top of US$1.07485.
The collapse of SVB – the largest bank failure since the 2008 financial crisis – has highlighted whether the Fed’s rate increases, which took rates from near 0 per cent a year ago to more than 4.5 per cent at present, have exposed cracks among key players within one of the world’s largest and most heavily interconnected banking sectors.
“The SVB crisis highlights the fact that... when you lift interest rates by quite a lot, you usually find out there are a few people swimming naked,” said Mr Rodrigo Catril, senior currency strategist at National Australia Bank.
“And that argument applies not just to the US, but also around the globe... Regardless of the fact that the authorities in the US have provided that security assurance that depositors will be OK, investors don’t know if they are going to be OK, and therefore they are running for the door.”
Market pricing now shows a 31 per cent chance that the Fed will keep rates on hold at its policy meeting next week, with rate cuts expected as early as June and till the end of the year.
Against a basket of currencies, the US dollar index rose 0.09 per cent to 103.77, after sliding 0.9 per cent on Monday and hitting a one-month low of 103.47.
The Australian dollar fell 0.29 per cent to US$0.6648, reversing some of its 1.3 per cent jump in the previous session, while the New Zealand dollar shed 0.18 per cent to stand at US$0.6209, having similarly surged 1.4 per cent on Monday.
A key US inflation report is due later on Tuesday, which could add to the Fed’s conundrum on whether it should stay on its rate hike path to tame persistent price pressures, or to hold back on tightening monetary policy further to give the banking system some breathing space.
Goldman Sachs analysts on Sunday said they no longer expect the Fed to deliver a rate hike at its March 22 meeting in the light of the recent stress.
“Rather than proceeding with more monetary tightening... the Fed finds itself in a terrible bind,” said Mr Eric Vanraes, a portfolio manager at Eric Sturdza Investments.
“It is highly probable that there will be no 50 basis-point increase in Fed funds on March 22. In the longer term, the tremors in the US banking system in recent days should kill off the Fed’s restrictive monetary policy of large rate hikes,” he said. REUTERS
