The Dollar Falls as Markets Assess the Fed's Rate Hike Path; The Yen Climbs
The dollar fell to near seven-week lows on Friday as investors remained wary of banks and traders assessed the Federal Reserve's odds of pausing interest rate rises. The dollar index, which compares the US currency to six major competitors, lost 0.097% to 102.48, slightly above the seven-week low of 101.91 set on Thursday.
On Thursday, the index posted its first increase in six trading days. The Fed hiked interest rates by 25 basis points on Wednesday, as expected, but adopted a cautious attitude on the outlook due to financial sector upheaval, even as Fed Chief Jerome Powell left the door open for more rate hikes if required.
To calm market fears, US Treasury Secretary Janet Yellen repeated on Thursday that she was willing to take more steps to guarantee that Americans' bank accounts were safe. According to the CME Fed Watch tool, markets are pricing in a 68% likelihood of the Fed holding interest rates steady at the next meeting and a 32% possibility of another 25 basis point rise.
Banking equities have taken a beating in the previous two weeks as a result of the abrupt bankruptcies of two smaller bankers in the United States and the emergency sale of troubled Swiss bank Credit Suisse to competitor UBS. According to Christopher Wong, currency analyst at OCBC, the FX universe appeared to indicate a bout of risk aversion, with haven proxies, gold, and the yen outperforming and most other currencies weakening.
"I believe that with sentiment being weak, price action can swing both ways depending on if any contagion shocks occur." The yen rose 0.51% to 130.16 per dollar after hitting a six-week high of 130.055 earlier in the session. Core consumer inflation in Japan dropped in February, but an index that excludes energy costs hit a four-decade high, according to statistics released on Friday.
With inflation still surpassing the Bank of Japan's 2% objective, economists believe the data will keep market expectations of a near-term change in the Bank of Japan's bond yield control policy alive. Similarly, the Bank of England hiked interest rates by 25 basis points on Thursday but indicated a surprising uptick in inflation would likely dissipate quickly, fueling speculation that it had reached the end of its walk cycle.
Sterling remained unchanged at $1.2285 after reaching a seven-week high of $1.2341 in turbulent trade on Thursday. The euro was up 0.03% at $1.0833, just a tad below its seven-week high of $1.0930 set on Thursday. Investors will be looking for flash Purchasing Managers' Index (PMI) data for March from the Eurozone, Germany, France, and the United Kingdom, which will be released later in the day to measure the strength of the European economy.
"The market will be looking at PMI releases throughout the world for an update on not just an activity but also what firms are saying on demand, supply chain disinflation, salaries, and pricing power," said Rodrigo Catril, senior currency strategist at National Australia Bank. The Australian dollar increased by 0.07% to $0.669, while the New Zealand dollar decreased by 0.14% to $0.624.