March 31, 2023

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The dollar is slipping amid a possible interest rate halt in the wake of the SVB collapse

SINGAPORE (Reuters) – The dollar fell sharply on Monday on growing expectations that the Federal Reserve will take a less aggressive monetary path as authorities step in to limit the fallout from the sudden collapse of Silicon Valley Bank (SIVB.O).

The US government announced several measures early in the Asian session, saying that all SVB clients will be able to access their deposits starting Monday.

Authorities also said depositors at Signature Bank of New York (SBNY.O), which New York state’s financial regulator closed on Sunday, will be compensated at no taxpayer loss.

The Fed announced that it will provide additional funding through a new Bank Term Funding Program, which will provide loans of up to one year to depository institutions, backed by Treasury bills and other assets held by these institutions.

The market turmoil from the SVB crash has investors speculating that the Fed will not raise interest rates by 50 basis points this month. Investors’ focus will now be on Tuesday’s inflation data to gauge how optimistic the Fed is likely to be.

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The dollar index, which measures the greenback against six rivals, fell 0.55% to near a one-month low of 103.67 after Goldman Sachs said it no longer expected the Federal Reserve to raise interest rates at its March 22 meeting. The index was most recently at 103.85.

“From an FOMC perspective, their concern is still inflation and inflation hasn’t really slowed,” said Carol Kong, currency analyst at the Commonwealth Bank of Australia, adding that Tuesday’s CPI will continue to show that inflation remains persistently high.

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“Looking at what happened in the US financial system, a 25 basis point increase is likely to increase by 50 basis points.”

The market is now pricing in approximately an 18% chance of the Fed sticking to its current rate and an 82% chance of a 25 basis point hike. In contrast, the market was pricing in a 70% chance of a 50 basis point hike before SVB collapsed.

“Final rate expectations should remain below peaks reached during Powell’s testimony last Tuesday, with a more cautious approach in the wake of this crash,” said Carl Chamota, chief market strategist at Corpay.

“This episode will contribute to higher levels of background volatility, as investors watch cautiously for other cracks to emerge as the Fed continues to tighten policy.”

Meanwhile, the Japanese yen rose 0.61% against the US dollar to 134.18 per dollar, after touching a one-month high of 133.58 earlier in the session.

The euro rose 0.72% to $1.072, hovering near the one-month high of $1.0737 hit earlier. The British pound was last trading at $1.2114, up 0.71% on the day.

The Australian dollar rose 1.31% to $0.666, and was on track for its biggest one-day percentage jump since Jan. 6, and the New Zealand dollar gained 1% at $0.620.

Bitcoin and other cryptocurrencies were higher, with bitcoin rising 11.74% to $22,454.09. Ethereum, which was last up 12.48% at $1,604.10.

The two-year US Treasury yield, which is usually in line with interest rate expectations, fell 14.9 basis points to 4.439%, its biggest three-day drop since Black Monday in 1987.

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The currency bid prices are at 0610 GMT

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Tokyo forex market information from Bank of Japan

Reporting by Ankur Banerjee in Singapore; Editing by Stephen Coates and Jacqueline Wong

Our standards: Thomson Reuters Trust Principles.