The Dollar Falls as Bank Lifelines Support Risk Level
The dollar fell on Friday as major US power brokers, including the government and banks, gave a lifeline to a failing regional institution to relieve financial system stress, giving investors some hope.
The bailout of First Republic Bank in the United States on Thursday increased risk appetite internationally on Friday, allowing the Australian and New Zealand currencies to jump.
This week has brought back memories of the 2008 financial crisis when dozens of organizations failed or were bailed out with billions of dollars from the government and central banks.
Three smaller lenders in the United States have had regulators and other banks step in to help them, while in Europe, Credit Suisse became the first major global bank to receive an emergency lifeline from the Swiss central bank since the financial crisis, restoring investor confidence and halting a deposit run.
With safeguards in place to support any distressed lenders and assurances from the European Central Bank that the eurozone banking system is strong, investors felt confident enough to sell the safe-haven US dollar.
"As long as there are no other negative headlines about the banking sector or anyone collapsing, we might just see a bit of risk-on, with equity heading higher, Treasuries giving up some of their gains, and the dollar rolling over in a combination of a relief rally and a position-squeeze," TraderX strategist Michael Brown said. The US dollar index slipped 0.21% to 104.07, owing primarily to gains in the euro and yen.
THE ECB RETAINS THE LINE
Meanwhile, the European Central Bank (ECB) raised interest rates by 50 basis points at its policy meeting on Thursday. Policymakers at the European Central Bank, led by President Christine Lagarde, attempted to reassure investors that eurozone banks were robust and that higher interest rates if anything, should boost their margins.
Had the ECB proceeded with a lesser rate hike, or possibly no increase at all, in light of the turbulence in the banking sector this week, that might have gravely unnerved investors and spurred a considerably worse sell-off, experts said.
Money markets are presenting a much milder prognosis for interest rates than they have done of late, but with core inflation still growing and proving tenacious, there would be little rationale for the central bank to resist future rate rises, experts said.
Indeed, ECB policymaker Peter Kazimir stated on Friday that the bank needs to continue rising interest rates for this reason. The euro was recently up 0.3% against the dollar, trading at $1.0646, and up 0.2% against the pound, trading at 87.75 pence. So far this week, the euro has failed to gain ground against the dollar, losing 0.8% against the sterling.
The pound gained 0.12% to $1.2132, while the Swiss franc gained 0.35%. Earlier this week, the Swiss franc fell the most against the US dollar in a single day since 2015, when the central bank relaxed its currency peg.
The Japanese yen soared, as it often does during times of significant market volatility or stress. It was recently up 0.5% at 133.13 per dollar, on track for a 1% weekly gain.
Officials from Japan's Ministry of Finance, Financial Services Agency, and Bank of Japan will meet on Friday evening to examine financial markets, according to the Nikkei newspaper, amid concerns over the US banking crisis.
The Australian dollar, which frequently excels when investors are positive, surged 0.8% to $0.6707, while the New Zealand dollar advanced 0.9% to $0.625.
Next week's Federal Reserve monetary policy meeting takes center stage. Some investors are expecting that the Fed would scale down its aggressive rate-hike campaign to relieve banking sector stress.