The U.S. dollar Index (DXY) declined for the second straight session on Friday as authorities took further actions to minimize pressure on the financial system, allowing most of the major currencies that had been battered this week in light of bank unrest to breathe a sigh of relief.
On Thursday, the United States took action to save First Republic Bank, which ignited a wave of risk appetite across global markets on Friday. As concerns surrounding a potential financial meltdown subsided and optimism surged through markets, the Euro, Pound Sterling along with antipodean currencies; Australian and New Zealand Dollars saw significant gains against the U.S. dollar.
The rescue of First Republic Bank allayed fears about another banking collapse in the U.S., boosting investor confidence while weakening the appeal of safe-haven currencies.
Major US banks allocated $30 billion in deposits to First Republic Bank, seeking to bolster assurance in the banking system. As stocks and volatile currencies soared on this news, it had the subsequent effect of driving down the value of the dollar.
This came after Credit Suisse declared on Thursday that it would borrow up to $54 billion from the Swiss National Bank. The central bank established a financial aide package for the embattled lender. These news helped soothing fears of a potential banking collapse that would hit major economies.
USD Dollar Down – Sentiment levels to Watch
Selling pressures have been pushing the U.S Dollar down for the second session in a row towards the 104.00 threshold by the end of the week.
The US Dollar Index (DXY), which gauges the dollar against a basket of six major rivals, is 0.38% down on Friday, and on track to end the week with 0.5% loss.
The appetite for risk continues to strengthen as worries surrounding the banking sector in both Europe and the US lessens. This trend is fostering a greater sense of assurance in investors across the globe, as they become more willing to take on risks.
Yet, the Japanese yen remained high, as traders continued to seek after safe investments amid apprehension that the recent stress in US and European banks may be an indication of a larger systemic crisis.
Despite renewed speculation that the Fed will shift its course in the near future, high inflation rates and robust US economy keep the optimistic outlook for the greenback.
US stock index futures are holding onto modest daily gains in pre-market trading while the 10-year US Treasury bond yield fluctuates around 3.5%.
The University of Michigan’s Consumer Sentiment Survey for March and the Federal Reserve’s Industrial Production data for February are the major highlights on the dollar’s calendar today.
Investors eagerly await the Federal Reserve’s policy decision next week, which is likely to be a moderate 25 basis point rate increase due to inflationary pressures subsiding and recent banking disruptions.
Euro Extends Post ECB Gains
Following the European Central Bank‘s decision to increase interest rates by 50 basis points in order to quell inflation, despite recent turbulence in financial markets, the euro has maintained its gains above $1.06 on Friday.
Policymakers affirmed that the banking sector was strong and they are keeping a close eye on market turbulence. Furthermore, the bank declared its readiness to step in as needed to maintain financial and price stability across the area.
The central bank revised its core inflation forecast to a 4.6% average for 2023, down to 2.5% in 2024 and 2.2% in 2025, while expecting inflation to “remain too high for too long“.
“ECB staff now see inflation averaging 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025.” ECB Statement.