Dollar Falls as SVB Pressures Dampen Rate Hike

While policymakers move to swiftly restore confidence, the dollar falls as U.S. banking crisis fears reduce the prospect of the Federal Reserve stepping up the pace of interest rate rises at its March 22 meeting, Swissquote Bank says.

“It is well possible that the Fed may simply forget about a 50 basis points hike this month or may not hike at all,” Swissquote analyst Ipek Ozkardeskaya says in a note.

Activity in Fed funds futures now sees a more than 98% chance of a 25bp rate rise, in line with February’s increase, following the collapse of U.S. lenders Silicon Valley Bank and Signature Bank in recent days, she says.

While the pressures on SVB is heating up due to extended impacts across the world, over the weekend another bank, Signature Bank in New York, was also taken into administration by US authorities.

USD: Policymakers move swiftly to restore confidence

US policymakers have acted quickly to restore confidence in the US banking system after Friday’s second-largest bank failure in history, ING Economics Chris Turner said in a note.

The Federal Reserve, US Treasury, and Federal Deposit Insurance Corporation have together announced two key measures. The first is that all uninsured depositors of SVB will be made whole.

Turner said this addresses the fear that uninsured depositors (in this case in the venture capital/tech sector) would lose deposits and would pull funds from other banks with high ratios of uninsured deposits (reports suggest 96% of SVB’s deposits were uninsured).

The second key measure has been the Fed announcing a new liquidity programme – the Bank Term Funding Program (BTFP). This will allow eligible financial institutions to access dollar liquidity in return placing US Treasuries, Agencies, or Mortgage-Backed Securities as collateral. Importantly the collateral values will be taken at par, meaning no write-downs.

“This addresses SVB’s problem of the need to meet deposit outflows with sales of securities – a move that forced SVB to realise losses and burn through equity capital”

For today, investors will watch US banking stocks carefully to gauge whether the above measures have been enough to restore confidence, Turner stated. Worryingly over the weekend another bank, Signature Bank in New York, was also taken into administration by US authorities.

One clear read for the market is that the Fed is not going to be able to deliver a 50bp hike on 22 March if, at the same time, it is introducing new liquidity measures for the US banking system. The market has now scaled back expectations for this month’s FOMC to +25bp, with some high-profile names now calling unchanged rates. Indeed, the pricing of the December 2023 FOMC meeting is now 75bp lower than in the middle of last week.

For FX this means the following. The first major US financial crisis since 2008 has seen a significant bullish dis-inversion of the US yield curve – which is dollar bearish.

“We have been arguing for some that time that bullish dis-inversion would be required to send the dollar lower – but had felt that it would be US disinflation or weak activity data – not a financial crisis – which would be the trigger”,

Turner said in a way, we are going back to former periods of risk aversion – when selling the dollar and buying US two-year Treasury notes was the key strategy in a crisis.

On Monday, the DXY dollar index drops 0.7% to 103.890 after hitting a three-and-a-half-week low of 103.683 earlier. # Dollar Falls as SVB Pressures Dampen Rate Hike.