NEW YORK, March 18 — The dollar fell yesterday as further declines in the shares of Credit Suisse and First Republic Bank rattled markets fearful of contagion and increased concerns that a recession lies ahead because of the impact of tighter monetary policy.
An early recovery in European stocks ran out of steam as investor sentiment remained fragile after a week of turbulence following the failure of Silicon Valley Bank on March 10.
US banks have sought a record US$153 billion (RM686.2 billion) in emergency liquidity from the Federal Reserve in recent days, while the US$54 billion loan for Credit Suisse and US$30 billion lifeline for First Republic failed to halt their stock declines. Credit Suisse fell 8 per cent in Europe and First Republic tumbled 30 per cent.
The dollar index, a measure of the dollar against six other currencies, slid 0.604 per cent as traders waited for the Fed’s two-day policy meeting that is expected to end with a one-quarter percentage point hike in interest rates on March 22.
Contracts for fed funds futures show a 61.3 per cent probability that the Fed will raise rates by 25 basis points, according to CME’s FedWatch Tool. Futures also show the Fed will have cut rates by July in a sign recession fears are mounting as the US central bank tightens monetary policy to fight high inflation.
Whether the banking turmoil of the past week leads to an immediate recession is hard to say, said Mazen Issa, senior FX strategist at TD Securities in New York.
“It probably increases the probability that you do have a recession and perhaps it increases the probability that you may have a hard-landing scenario, a more severe recession dynamic,” he said.
“Once you have one regional bank go down, households question whether or not the regional banks are in trouble, that’s a natural human emotion to feel,” he said.
Banking troubles revived memories of the 2008 financial crisis, when dozens of institutions failed or were bailed out with billions of dollars of government and central bank money.
Three smaller US lenders, including First Republic, have had regulators and other banks step in to prop them up, while in Europe, Credit Suisse became the first major global bank since the financial crisis to get an emergency lifeline.
“There is a wait and see approach as to what will happen with the US economy,” said Ed Moya, senior market analyst at OANDA in New York. “Now we’re not debating a’soft landing, no landing.’ We’re debating is it a mild or severe recession?”
The euro rose 0.66 per cent to US$1.0675.
The rescue of First Republic on Thursday initially boosted risk appetite yesterday as concerns about global banks eased, making way for surges in the Australian and New Zealand dollars.
Sterling last traded at US$1.2192, up 0.70 per cent, while the dollar fell 0.39 per cent against the Swiss franc. Earlier this week, the franc plunged the most against the dollar in one day since 2015, when the Swiss central bank loosened its currency peg.
The Japanese yen, which tends to benefit in times of extreme market volatility or stress, strengthened 1.48 per cent versus the greenback to 131.77 per dollar.
Japan’s Ministry of Finance, Financial Services Agency and Bank of Japan officials met yesterday evening to discuss financial markets.
Masato Kanda, vice finance minister for international affairs, told reporters after the trilateral meeting that the government, the central bank and the banking watchdog would coordinate to ensure the stability of the financial system.
The Australian dollar, which often outperforms when investors are feeling optimistic, rose 0.81 per cent to US$0.671. — Reuters