Dollar under pressure as yen gains on global banking woes

The dollar remained weak against most major currencies on Tuesday, as the ongoing turmoil in the global banking sector dampened the appeal of the greenback. The yen, on the other hand, rose to a one-week high against the dollar, as investors sought safety in the Japanese currency amid fears of contagion and financial instability.

The dollar index, which measures the currency against six rivals, was 0.27% lower on the day at 102.84, not far from the near 7-week low of 101.91 touched on Thursday. The greenback suffered after the Federal Reserve on Wednesday raised interest rates by 25 basis points, as expected, but took a cautious stance on the outlook because of the banking sector turmoil. Fed Chair Jerome Powell kept the door open for further rate rises if necessary, but also signaled that the central bank was ready to act if the situation worsened.

Markets are pricing in around a 55% chance of the Fed standing pat on interest rates in its next meeting in May and anticipate a rate cut as early as July, according to the CME FedWatch Tool. Many economists and analysts expect the U.S. economy to slow in the fourth quarter, which makes further rate hikes less likely and will dent the appeal of the greenback, which has benefited from the relative strength of the United States compared to other major economies.

Dollar under pressure as yen gains on global banking woes
Dollar under pressure as yen gains on global banking woes

Yen surges as investors seek safety

The yen, meanwhile, gained 0.77% to 131.75 per dollar, reversing some of its recent losses against the U.S. currency. Risk-averse investors had sent the yen to a seven-week high of 129.65 per dollar on Friday and the currency was on track to clock a 3.5% gain in March. The Japanese currency is often seen as a safe haven in times of market stress, as Japan has a large current account surplus and a stable political system.

The yen’s rise also reflected the growing worries over the health of the global banking system, which has been battered this month following the sudden collapse of two U.S. lenders and the rescue of Credit Suisse. The Swiss bank announced on Monday that it would take a $4.7 billion hit from its exposure to Archegos Capital Management, a U.S. hedge fund that defaulted on margin calls last week. Credit Suisse also warned of further losses and said it would replace several senior executives.

The banking crisis has also affected other major financial institutions, such as Nomura, Deutsche Bank, and Morgan Stanley, which have reported losses or potential losses from their dealings with Archegos. The situation has raised concerns about the transparency and regulation of the shadow banking sector, as well as the systemic risks posed by highly leveraged and complex financial transactions.

Other currencies mixed amid thin trade

The euro was 0.36% higher at $1.0798, after data on Monday showed that German business morale unexpectedly improved in March despite the banking sector turmoil. The single currency was also supported by the progress in the vaccination campaign in the European Union, which has lagged behind other regions due to supply shortages and bureaucratic hurdles. The bloc’s leaders agreed last week to boost the production and distribution of Covid-19 vaccines, as well as to coordinate on travel restrictions and vaccine certificates.

The Australian dollar fell 0.4% to $0.6663, putting it on course to snap a four-day streak of gains. The Aussie was hurt by the weaker-than-expected Chinese services data, which showed that the sector grew at its slowest pace in 10 months in March. China is Australia’s largest trading partner and a key source of demand for its commodities. The Australian dollar was also weighed down by the dovish tone of the Reserve Bank of Australia, which kept its policy settings unchanged on Tuesday and reiterated its commitment to maintain low interest rates until at least 2024.

The British pound was higher against the dollar after Bank of England Governor Andrew Bailey signaled on Monday that interest rate-setters would focus on fighting inflation and would not be swayed unduly by worries about the global banking system. The UK economy has shown signs of resilience amid the easing of lockdown measures and the rapid rollout of Covid-19 vaccines. The pound was also boosted by the optimism over the UK-EU trade relationship, as the two sides agreed to cooperate on financial services regulation and to resolve the post-Brexit issues in Northern Ireland.

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