Dollar slides as Fed rate hike expectations slump on SVB collapse

The dollar fell on Monday as markets bet the Federal Reserve will be less aggressive in raising interest rates to curb inflation after U.S. authorities stepped in to limit the fallout from the sudden collapse of Silicon Valley Bank.

President Joe Biden said the administration’s swift actions on Sunday to ensure depositors can access their funds in SVB and Signature Bank should give Americans confidence that the U.S. banking system was safe.

The Fed on Sunday announced it would make additional funding available through a new Bank Term Funding Program, which would offer loans of up to one year to depository institutions, backed by Treasuries and other assets these institutions hold.

The dollar index, which measures the greenback against six other currencies, fell 0.46% as short-dated Treasury yields tumbled.

The two-year note’s yield plunged 48.9 basis points to 4.099% in the biggest one-day drop since the financial crisis of 2008. The note was on track for its biggest three-day decline since the Black Monday crash of 1987.

”The financial crisis is cutting short monetary tightening. There’s a big shift in rate expectations,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

”The markets already is pricing in a cut again in Q4,” he said.

Fed funds futures also tumbled, with expectations of the Fed’s terminal rate sliding to 4.14% in December from above 5% on Friday. Futures showed a 21% chance of no increase in rates when policymakers end a two-day meeting on March 22, according to CME’s FedWatch Tool.

CPI IN FOCUS

With speculation rampant on how the Fed will handle monetary policy and fight to rein in inflation, the focus is the release on Tuesday of the consumer price index (CPI) data.

Goldman Sachs said it no longer expects the Fed to deliver a rate hike next week.

”There’s been a radical change in interest rate expectations and in that scenario the dollar has weakened,” said Niles Christensen, chief analyst at Nordea.

If concerns over the U.S. banking system are contained and do not spread, ”expectations for rate hikes should be revived quickly,” he said.

Safe-haven currencies, such as the Japanese yen and Swiss franc, benefited from the fallout from SVB.

The Japanese yen strengthened 1.51% at 132.98 per dollar, while the dollar fell 1.12% against the Swiss franc at 0.911.

The euro, meanwhile, was up 0.62% to $1.0709. Earlier it hit a near one-month high of $1.0737, ahead of the European Central Bank’s policy meeting on Thursday.

Expectations call for the ECB to deliver a 50-basis point hike, Christensen said.

”The question is how hawkish will the ECB be. We think they’ll signal there will be more rate hikes to come.”

Sterling traded at $1.2131, up 0.86% on the day. The Mexican peso, stronger than the dollar all year, lost 1.89% versus the greenback at 18.85.

The Australian dollar jumped 1.41% to $0.667, on track for its biggest one-day percentage jump since Feb. 7.

Bitcoin and other cryptocurrencies rallied over the weekend, with bitcoin up 6.18% to at $23,554.00.