The U.S. dollar plunged on Tuesday, exchanging hands near a multi-week low before rebounding slightly. Traders worried about the outcome of two major American banks’ failure. The Federal Reserve assured the citizens that they wouldn’t lose their funds, promising earlier on Monday that the customers would get access to their deposits. However, investors now contemplate the possibility of a broader systemic crisis after the collapse. Moreover, some analysts think the Fed might halt its aggressive tightening policy.
The failure of Silicon Valley Bank and Signature Bank blindsided market participants on Sunday. This news came out suddenly and unexpectedly. On Monday, U.S. President Joe Biden promised citizens that he would ensure the U.S. banking system was safe and worked seamlessly. Traders remained anxious despite several assurances from the President and various Fed officials.
Meanwhile, the U.S. government started issuing emergency measures over the weekend to bolster investors’ confidence in the American banking system. Investors ceased betting on more rate hikes, though. They thought the government had enough on its plate to continue with tightening. Consequently, the Fed funds futures surged forward while the greenback plunged low.
Every time the investors bet on the agency hindering rate hikes that are a typical occurrence. In addition, the current crisis in the country encouraged traders to move to other safe-haven currencies, such as the Japanese yen and the Swiss franc.
The U.S. dollar had already shaved off a substantial amount in the previous session but added to those losses on Tuesday. The currency fell sharply in early Asia trade. It managed to rebound slightly later, though. The greenback traded at 133.42 against the Japanese yen after dropping by 1.4% on Monday.
What about the euro and sterling?
The common currency plummeted by 0.09% on Tuesday. It exchanged hands at $1.0719 at last. However, the euro remained near its one-month peak of $1.07485 on Monday. The British pound hit a high in the previous session but ended trading in the red today. It dropped by 0.19% at $1.2159, still near its $1.2200 peak.
Economists stated that SVB’s collapse was the largest bank failure the markets have seen since the 2008 financial crisis. According to the experts, Federal Reserve’s relentless rate hikes applied pressure on key players. The U.S. central bank increased rates from near zero per cent to 4.5% over the last year. Such changes weighed on other banks, especially considering their interconnectedness.
Rodrigo Catril, the senior currency strategist at National Australia Bank, noted that Silicon Valley Bank’s collapse wasn’t so surprising, given the pressure from rate hikes. This crisis only highlighted what to expect when the central bank increases interest rates so much in a short period. He also added that this is true for the Federal Reserve and other major central banks across the globe. Even though the U.S. government tried to assure depositors they wouldn’t suffer due to this incident, traders are still concerned about the aftermath of the crisis. Many investors are already looking for alternative ways to continue investing funds.
On Tuesday, the U.S. dollar index soared by 0.09% to 103.77 against a basket of six major currencies. It shaved off 0.9% in the previous session, plunging to a one-month low of 103.47.
How are the Aussie and other Asian currencies faring?
The Australian dollar dropped by 0.29% to $0.6648 on Tuesday. It lost some gains from its 1.3% jump in the previous session. At the same time, the New Zealand dollar plunged by 0.18%. It exchanged hands at $0.6209 after soaring by 1.4% on Monday.
Furthermore, on Tuesday, EM market shares tumbled to their lowest level in 2023. Markets in Asia were volatile, especially in China and Hong Kong. The collapse of Silicon Valley Bank influenced them, as well. As a result, the MSCI’s index for EM market equities has declined by more than 10% from its January high. It overall shaved off 1.7% on Tuesday.
The MSCI’s index for emerging currencies traded in narrow ranges for the day. South Africa’s rand plummeted by 0.5%. New data showed that total mining output in the country dropped by 1.9% year on year in January.
Hungary’s forint also decreased, falling to a five-week low. It managed to recover some losses later, though. The Czech crown also collapsed to its lowest level since early February on Tuesday.
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