US dollar drops as Fed rate hike expectations trimmed on SVB collapse

THE US dollar fell on Monday (Mar 13) on expectations the Federal Reserve will be less aggressive in raising interest rates after authorities stepped in to limit the fallout from the sudden collapse of Silicon Valley Bank.

The US government announced several measures early in the Asian trading day, saying all SVB customers will have access to their deposits starting on Monday.

The authorities also said depositors of New York’s Signature Bank, which was closed on Sunday by the New York state financial regulator, would be made whole at no loss to the taxpayer.

The Fed announced it would make additional funding available through a new Bank Term Funding Program, which would offer loans of up to one year to depository institutions, backed by Treasuries and other assets these institutions hold.

The market turmoil from the SVB collapse led investors to speculate the Fed will no longer raise interest rates by a super-sized 50 basis points this month. The focus will now be on Tuesday’s inflation data to gauge how hawkish the Fed is likely to be.

The dollar index, which measures the US currency against six others, slipped as much as 0.55 per cent to near one-month lows of 103.67 after Goldman Sachs said it no longer expects the Fed to deliver a rate hike at its March 22 meeting. The index was last at 104.12.

The market is now pricing a nearly 60 per cent chance of the Fed sticking to its current rate and around a 40 per cent chance of a 25 basis point hike. In contrast, the market was pricing a 70 per cent chance of a 50 basis point hike before the SVB collapse.

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

“The reason we’re seeing such repricing in rate hike expectations is the collapse of the banks. If we don’t see any spreading, expectations for rate hikes should be revived quickly.”

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

The yen strengthened 1.5 per cent to 133.03 per U.S. dollar, its highest level in nearly a month, while the US currency fell 0.8 per cent versus the franc to 0.9140.

Meanwhile, the euro was up 0.29 per cent at US$1.0670, having earlier hit a near one-month high of US$1.0737, ahead of the European Central Bank’s policy meeting on Thursday.

“The ECB is still expected to deliver a 50-basis point hike,” Nordea’s Christensen added.

“The question is how hawkish will the ECB be. We think they’ll signal there will be more rate hikes to come.”

Sterling was last trading at US$1.2082, up 0.39 per cent on the day.

The Australian dollar jumped 0.87 per cent to US$0.6639, and was on track for its biggest one-day percentage jump since Feb 7. The New Zealand dollar gained 1 per cent to trade at US$0.6194.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was down 44 basis points at 4.1447 per cent, on track for its biggest three-day decline since Black Monday in 1987.

Bitcoin and other cryptocurrencies rallied over the weekend, with bitcoin last at US$22,114 and ether at US$1,581. REUTERS