Relief rally on banks rescue lifts riskier currencies; dollar slips

(C) Reuters. FILE PHOTO: A U.S. one dollar banknote is seen in this illustration taken November 23, 2021. REUTERS/Murad Sezer/Illustration/File Photo

By Rae Wee

SINGAPORE (Reuters) – The dollar slipped on Friday after authorities and banks moved to ease stress on the financial system, taking the heat off most major currencies that tumbled this week in the wake of bank turmoil.

Action to rescue First Republic Bank (NYSE:FRC) in the U.S. on Thursday boosted risk appetite globally on Friday as fears of a global banking crisis eased, making way for surges in the Australian and New Zealand dollars.

The antipodean currencies are traditionally shunned in times of risk aversion.

The Aussie jumped 0.79% to $0.6710 in Asia trade on Friday, while the kiwi rose 0.67% to $0.62375.

With oversight by authorities, large U.S. banks injected $30 billion in deposits into First Republic, which was caught up in a widening crisis triggered by the collapse of two other mid-size U.S. banks over the past week.

The move followed Credit Suisse’s announcement earlier on Thursday that it would borrow up to $54 billion from the Swiss National Bank, after the central bank threw a financial lifeline to the embattled Swiss lender.

Credit Suisse had similarly become embroiled in widespread contagion following the implosion of U.S.-based Silicon Valley Bank (SVB), which resulted in a 30% plunge in its shares earlier in the week.

But even as the market rout stoked fears about the health of Europe’s banks, the European Central Bank (ECB) went ahead with a hefty 50-basis-point rate hike at its policy meeting on Thursday.

ECB policymakers sought to reassure investors that euro zone banks were resilient and that if anything, the move to higher rates should bolster their margins.

The euro’s reaction to the decision was fairly muted, though it gained more ground in Asia trade on Friday, rising 0.32% to $1.0645.

“The euro zone banking sector remains in reasonably solid shape,” said Wells Fargo (NYSE:WFC) international economist Nick Bennenbroek.

“Should market strains ease and volatility recede in the weeks and months ahead, persistent inflation should in our view be enough to elicit further (ECB) tightening.”

Elsewhere, sterling edged 0.28% higher to $1.2144, while the Swiss franc rose 0.3%. Earlier in the week, the Swissie had plunged the most against the dollar in a day since 2015.

The Japanese yen remained elevated, as traders still looked to safety assets, still fearing that recent stress unfolding across banks in the U.S. and Europe could be just an early stage of a widespread systemic crisis.

It was last 0.4% higher at 133.23 per dollar, on track to rise more than 1% for the week.

“The market gyrations of the past week are not rooted in a banking crisis, in our view, but rather are evidence of financial cracks resulting from the fastest interest rate hike campaigns since the early 1980s,” said analysts at BlackRock (NYSE:BLK) Investment Institute.

“Markets have woken up to the damage caused by that approach – a recession foretold – and are starting to price it in.”

The Federal Reserve’s monetary policy meeting next week now moves to centre stage. Some investors are hoping that the Fed could slow down on its aggressive rate-hike campaign in a bid to ease the stress on the financial sector.

“The turmoil in the banking sector is complicating the outlook for Fed policy, but the impact may be more nuanced than the Fed simply reversing course,” said Philip Marey, senior U.S. strategist at Rabobank.

The U.S. dollar index fell 0.27% to 104.11.