The US dollar slumped on Tuesday, changing hands near a multi-week low before bouncing slightly. Traders were concerned about the outcome of the bankruptcy of two major US banks. The Federal Reserve assured citizens that they would not lose their funds and promised on Monday that customers would have access to their deposits. However, investors are now contemplating the possibility of a broader systemic crisis after the crash. Also, some analysts believe that the Fed could stop its aggressive tightening policy.
The failure of Silicon Valley Bank and Signature Bank surprised market participants on Sunday. This news came out suddenly and unexpectedly. On Monday, US President Joe Biden promised citizens that he would make sure the US banking system was secure and running smoothly. Traders remained anxious despite various reassurances from the president and various Fed officials.
Meanwhile, the US government began issuing emergency measures over the weekend to bolster investor confidence in the US banking system. However, investors stopped betting on further rate hikes. They thought the government had enough on its plate to continue tightening up. Consequently, fed funds futures soared while the dollar plunged.
Every time investors bet on the agency they hinder rate hikes that are a typical occurrence. Also, the current crisis in the country encouraged traders to move to other safe-haven currencies, such as the Japanese yen and the Swiss franc.
The US dollar had already trimmed a substantial amount in the previous session, but added to those losses on Tuesday. The currency fell sharply in early Asian trading. However, he managed to recover a little later. The dollar traded at 133.42 against the Japanese yen after falling 1.4% on Monday.
What about the euro and the pound sterling?
The common currency plunged 0.09% on Tuesday. It changed hands at $1.0719 at last. However, the euro held close to its one-month high of $1.07485 on Monday. The British pound reached a high the previous session, but ended up trading in the red today. It fell 0.19% to $1.2159, still near its peak of $1.2200.
Economists claimed the SVB collapse was the biggest bank failure markets have seen since the 2008 financial crisis. The Federal Reserve’s relentless rate hikes put pressure on key players, experts say. The US central bank raised rates from close to zero percent to 4.5 percent over the past year. Such changes weighed on other banks, especially considering their interconnection.
Rodrigo Catril, a senior currency strategist at National Australia Bank, said the collapse of Silicon Valley Bank was not all that surprising, given the pressure of rate hikes. This crisis just highlighted what to expect when the central bank raises interest rates that much in a short period. He also added that this is true of the Federal Reserve and other major central banks around the world. Despite the fact that the US government tried to assure depositors that they would not suffer due to this incident, traders are still worried about the consequences of the crisis. Many investors are already looking for alternative ways to continue investing funds.
On Tuesday, the US dollar index rose 0.09% to 103.77 against a basket of six major currencies. It shed 0.9% in the previous session, falling to a one-month low of 103.47.
How are the Australian dollar and other Asian currencies doing?
The Australian dollar fell 0.29% to $0.6648 on Tuesday. It lost some gains from its 1.3% jump in the previous session. At the same time, the New Zealand dollar plunged 0.18%. It changed hands at $0.6209 after rising 1.4% on Monday.
Also, on Tuesday, emerging markets’ market shares fell to their lowest level in 2023. Asian markets were volatile, especially in China and Hong Kong. The collapse of Silicon Valley Bank also influenced them. As a result, the MSCI index for emerging market stocks is down more than 10% from its January peak. Overall, it was down 1.7% on Tuesday.
The MSCI Emerging Currency Index traded in tight ranges during the day. The South African rand slumped 0.5%. The new data showed that total mining production in the country fell 1.9% year-on-year in January.
The Hungarian guilder also declined, falling to a five-week low. However, he managed to recoup some losses later. The Czech crown also collapsed to its lowest level since early February on Tuesday.
