- Dollar draws a breath as the Fed comes into focus.
The dollar remained steady during Tuesday’s holiday-shortened Asian session, failing to recover from recent lows as traders predicted that banking stress would prevent the Federal Reserve from raising rates significantly—or at all—later this week.
The dollar edged slightly against the euro, reaching $1.0712, and made some headway against the Australian and New Zealand currencies. It maintained its position at 131.24 yen, barely above a five-week low of 130.55.
John Velis, FX and macro strategist for the Americas at BNY Mellon stated that recent rate volatility and overall asset market volatility have been “exceptional” (NYSE: BK).
The situation has become murky for the March (Fed) meeting and beyond. A significant repricing of future rate expectations has been one result.
The highest was seen at 5.5% only a few weeks ago, compared to roughly 4.8% presently, he said.
Although the broad unease in the financial markets has restrained selling, the dollar has fallen in line with those forecasts.
When the Fed delivers its monetary policy decision on Wednesday, the markets are pricing in a 25% probability that it will remain unchanged, with a 75% chance that interest rates will increase by 25 basis points, according to the CME FedWatch tool.
Even before the latest bout of volatility, according to minutes released on Tuesday, Australia’s central bank had agreed to evaluate the argument for a rate pause at its April policy meeting. This news caused the Australian dollar to decline by 0.5% to $0.6686.
The announcement on Sunday that UBS planned to acquire rival Credit Suisse in a shotgun merger facilitated by Swiss authorities caused some satisfaction that the most pressing issues had been managed.
But the sentiment is still shaky, Investors are coping with bank stress that in a matter of days has grown from instability in regional U.S. banks to the downfall of a most lender.
Markets are still uneasy, but it is encouraging to see how quickly policymakers are reacting to the changing risks in the banking industry, according to Alvin Tan, head of Asia FX strategy at RBC Capital Markets.
Furthermore, on Sunday, the Federal Reserve announced it would conduct daily currency swaps in collaboration with other central banks to ensure there would be an ample supply of US dollars.
According to Carol Kong, a currency analyst at the Commonwealth Bank of Australia, “there has been very modest demand for U.S. dollars at the Fed swap lines, so that is a bullish sign in and of itself” (OTC: CMWAY).
But there are still some indications of stress in the funding markets, she continued, so currencies will continue to be quite cautious.
The pound decreased 0.1% to $1.2260. To 103.40, the US dollar index increased by 0.06%.
After IMF financing for Sri Lanka was approved, the battered Sri Lankan currency gained nearly 7% against the dollar.
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