- Relief rally on bank bailouts supports riskier currencies; the dollar declines.
After banks and government agencies took action to reduce strain on the financial system, most currencies that had fallen this week, as shown by bank turbulence, started to recover on Friday.
While worries of a global banking crisis subsided on Friday as shown by the U.S.’s action to save First Republic Bank (NYSE: FRC), the Australian and New Zealand dollars saw increases.
During periods of risk aversion, antipodean currencies are typically avoided.
In Friday’s Asian trading, the Australian dollar rose 0.76% to $0.6708 the New Zealand dollar increased by 0.69% to $0.6239.
With government monitoring, American banks pumped $30 billion in deposits into the First Republic, which was embroiled in a growing crisis brought on by the failure of two other mid-sized American banks in the previous week.
The action came after Credit Suisse said earlier on Thursday that it would borrow up to $54 billion from the Swiss National Bank after the latter gave the struggling Swiss lender a financial lifeline.
Following the collapse of U.S.-based Silicon Valley Bank (SVB), which caused a 30% drop in its shares earlier in the week, Credit Suisse had also become involved in a worldwide contagion.
The European Central Bank (ECB) proceeded with a significant 50-basis-point rate hike at its policy meeting on Thursday, despite market turmoil fueling concerns about the health of Europe’s banks.
Investors were reassured by ECB policymakers that Eurozone banks were robust and that the switch to higher rates should, if anything, increase their margins.
Although the euro’s response to the decision was somewhat subdued, it made more progress in Friday’s Asian trading, jumping 0.33% to $1.0647.
International economist Nicholas Bennenbroek of Wells Fargo (NYSE: WFC) remarked, “The Eurozone banking system remains in relatively sound health.”
Persistent inflation should, in our opinion, be sufficient to elicit additional ECB tightening if market stresses and volatility improve in the weeks and months ahead.
In other currency movements, the pound nudged up 0.4% to $1.2159, while the Swiss franc gained 0.35%. The Swiss franc experienced its steepest decline against the dollar in a single day since 2015 earlier this week.
The Japanese yen continued to rise as investors sought safe-haven assets out of concern that recent stress spreading through banks in the U.S. and Europe might only be the beginning of a significant systemic crisis.
At 133.01 per dollar, it was recently 0.56% higher, on pace to increase by more than 1% for the week.
In response to concerns over the U.S. banking crisis, representatives from Japan’s Ministry of Finance, Financial Services Agency, and Bank of Japan will meet on Friday evening to discuss financial markets, according to the Nikkei newspaper.
According to BlackRock (NYSE: BLK) Investment Institute analysts, the recent market gyrations are evidence of financial fractures caused by the fastest interest rate hike campaigns since the early 1980s rather than a banking disaster.
The markets have begun to price in the recession that will result from that strategy after realizing the harm it will do.
The focus now shifts to the Federal Reserve’s monetary policy meeting the following week. To minimize the strain on the financial industry, some investors are hopeful that the Fed will dial back its aggressive rate-hike campaign.
Philip Marey, the senior U.S. strategist at Rabobank, said that while the instability in the banking industry is affecting the outlook for Fed policy, the impact may be more complex than the Fed simply changing course.
To 104.07, the US dollar index decreased by 0.31%.
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