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Dollar gains as panic returns, ECB meets amidst banking crisis


The dollar and the yen Wednesday’s main gainers

Franc and euro lose the most ground on Credit Suisse fallout

ECB decides on interest rates, with investors split on hike size

Wall Street pares loses, but concerns remain

Investors seek safety as Credit Suisse sparks more fears

The dollar strengthened against all but one of the other major currencies on Wednesday. It lost ground only against the yen, as market participants entered panic mode again after Credit Suisse’s largest shareholder said it could not provide further support, citing regulatory issues.

The Swiss franc and the euro fell the most, with Credit Suisse’s own shares tumbling to record lows. European and US bond yields plunged again with investors scaling back their Fed hike bets in a panicked manner. At some point during the day, they were expecting the Fed to pause as early as next week and saw interest rates ending the year at around 3.45%. The lower-than-expected PPI numbers for February may have given the market an extra reason for taking hike bets off the table, as they may have added to speculation that consumer prices could also cool faster in the months to come.

Today, the dollar is pulling back, outperforming only the kiwi, which came under strong pressure after New Zealand’s GDP data pointed to a 0.6% contraction for Q4 2022. The pullback in the greenback was the result of easing jitters due to headlines that the Swiss government was holding talks on how to stabilize the bank, with Credit Suisse itself announcing later that it would borrow as much as 50bn francs from the Swiss National Bank (SNB).

Investors became somewhat more confident that the Fed could eventually deliver another 25bps hike next week, currently assigning a nearly 70% chance to such a move. That said, the tension did not totally vanish, and this is evident by the fact that they are still seeing almost 100bps worth of rate cuts by the end of the year.

With Fed Chair Powell appearing in a hawkish suit just last week and saying that they may need to raise rates to levels higher than previously expected, it is hard to envision a new dot plot that matches the market’s currently implied path. Therefore, the risks surrounding next week’s FOMC meeting may be tilted to the upside.

Will the ECB deliver a smaller-than-telegraphed hike?

But investors did not scale back their hike bets regarding only the Fed. They also did so for the ECB, which meets today. Despite the Bank telegraphing another 50bps hike and President Lagarde saying last week that such a move is “very very likely”, market participants are now evenly split between 25 and 50bps.

Therefore, with a 50bps being far from a done deal, the euro could gain if officials decide to stick to their guns. Nonetheless, whether the common currency can hold onto any decision-related gains may depend on the updated economic projections and any signals regarding the upcoming meetings. What’s more, how worried the ECB appears with regards to the banking crisis may also impact the market’s thinking about the Fed.

Wall Street tumbles but rebounds in late trade

European stocks saw their worst day in over a year on Wednesday due to fears about the stability of the banking sector, with the selloff rolling into the US session. That said, headlines that the Swiss government and central bank are coming to Credit Suisse’s rescue allowed Wall Street’s main indices to recoup some ground, with the Nasdaq closing with slight gains. That said, with traders remaining on the edge of their seats, the risk of another round of selling is more than visible, especially if central banks continue to raise interest rates more aggressively than the market currently wants them to.

The early slide in equities and the tumble in bond yields around the globe added extra fuel to gold’s engines, with the precious metal surpassing Monday’s high and getting closer to the high of February 2 at $1,960.

Source: https://www.xm.com/research/analysis/marketComment/xm/daily-market-comment-dollar-gains-as-panic-returns-ecb-meets-amidst-banking-crisis-176185
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