The dollar slipped on Friday after top U.S. power brokers including the government and banks threw a lifeline to a struggling regional lender to ease stress on the financial system, which returned some confidence to investors.
The rescue of First Republic Bank in the U.S. on Thursday boosted risk appetite globally on Friday as concerns about global banks eased, making way for surges in the Australian and New Zealand dollars.
This week has revived memories of the 2008 financial crisis, in which dozens of institutions failed or were bailed out with billions of dollars of government and central bank money.
Three smaller U.S. lenders have had regulators and other banks step in to prop them up, while in Europe, Credit Suisse became the first major global bank to get an emergency lifeline from the Swiss central bank since the financial crisis, restoring investor confidence and stopping a haemorrhage in customer deposits.
With measures in place to shore up any obviously struggling lenders and assurances from the likes of the European Central Bank that the euro zone banking system is robust, investors felt emboldened enough to sell the safe-haven U.S. dollar.
”As long as we don’t get any other negative headlines around the banking sector, or anyone collapsing, we might just see a bit of risk-on, equity heading higher, Treasuries giving up some of their gains and the dollar rolling over in a combination of a relief rally and a position-squeeze,” TraderX strategist Michael Brown said.
The U.S. dollar index fell 0.21% to 104.07, led mostly by strength in the euro and the yen.
ECB holds the line
Meanwhile, the European Central Bank (ECB) delivered a hefty 50-basis-point rate hike at its policy meeting on Thursday.
ECB policymakers, led by President Christine Lagarde, sought to reassure investors that euro zone banks were resilient and that if anything, higher rates should bolster their margins.
Had the ECB proceeded with a smaller rate hike, or even no increase at all, in light of the turmoil in the banking sector this week, that could have seriously spooked investors and prompted a far bigger sell-off, analysts said.
Money markets are showing a much tamer outlook for interest rates than they have done of late, but with core inflation still rising and proving stubborn, there would be little justification for the central bank to refrain from more rate hikes, analysts said.
Indeed, ECB policymaker Peter Kazimir on Friday said the bank needed to keep raising rates for this reason.
The euro was last up 0.3% against the dollar at $1.0646, and against the pound rose 0.2% to 87.75 pence. So far this week, the euro has struggled to make any headway against the dollar and has lost 0.8% against sterling.
Sterling rose 0.12% to $1.2132, while the Swiss franc rose 0.35%. Earlier in the week, the Swissie plunged the most against the dollar in a day since 2015, when the central bank loosened its currency peg.
The Japanese yen, which also tends to benefit in times of extreme market volatility or stress, rose. It was last up 0.5% at 133.13 per dollar, set for a weekly rise of 1%.
Japan’s Ministry of Finance, Financial Services Agency and Bank of Japan officials will meet on Friday evening to discuss financial markets, the Nikkei newspaper reported, amid fears of the U.S. banking crisis.
The Australian dollar, which often outperforms when investors are feeling optimistic, jumped 0.8% to $0.6707, while the kiwi rose 0.9% to $0.625.
The Federal Reserve’s monetary policy meeting next week now moves to centre stage. Some investors are hoping that the Fed could slow down on its aggressive rate-hike campaign in a bid to ease the stress on the financial sector.