The dollar fell on Friday as risk sentiment improved as authorities and banks attempted to alleviate pressure on the financial system in key markets, relieving pressure from other major currencies that had fallen earlier in the week in response to bank turbulence.
Major U.S. banks pumped $30 billion in deposits into First Republic Bank on Thursday, rescuing the lender from a deepening crisis precipitated by the failure of two other mid-sized U.S. banks in the last week.
Risk-sensitive currencies, such as the Australian and New Zealand dollars, which were among the greatest gainers in Asia trading, were able to increase on Friday as a result of the cautious calm that swept throughout markets.
The Australian dollar increased 0.4% to $0.6684, while the New Zealand dollar advanced 0.3% to $0.62145.
The $30 billion rescue plan was devised by the U.S. Treasury, Federal Reserve, and major banks in response to Credit Suisse’s announcement earlier on Thursday that it would borrow up to $54 billion from the Swiss National Bank.
It had been equally entangled in worldwide contagion following the collapse of Silicon Valley Bank in the United States (SVB).
The European Central Bank (ECB) still proceeded with a substantial 50-basis-point rate rise at its Thursday policy meeting, despite a 30-percent drop in the shares of a troubled Swiss bank that raised worries about the soundness of Europe’s banks.
ECB policymakers attempted to reassure investors that euro zone banks were robust and that the transition to higher interest rates would, if anything, strengthen their margins.
The euro’s response to the decision was rather subdued, although it managed to gain 0.3% on Thursday. Last, it was up 0.14 percent at $1.0625.
According to Wells Fargo’s international economist Nicholas Bennenbroek, the banking system in the euro zone is in a relatively sound state.
“Should market tensions relax and volatility decline in the next weeks and months, we believe sustained inflation will be sufficient to prompt more (ECB) tightening.”
In other markets, the pound advanced 0.15 percent to $1.2128, while the Swiss franc increased 0.1%. Earlier in the week, the Swiss franc fell against the dollar by the highest in a single day since 2015.
The Japanese yen stayed elevated and was last quoted at 133.30 per dollar, or 0.3% higher than its previous value.
Traders flocked to the yen, which is traditionally viewed as a safer option in times of trouble, as fears grew that the recent stress affecting banks in the U.S. and Europe might be just the beginning of a wider systemic catastrophe.
“The market gyrations of the last week were not caused by a banking crisis, in our opinion, but rather by the quickest interest rate rise campaigns since the early 1980s,” stated experts at BlackRock Investment Institute.
“The markets have awoken to the damage created by this strategy – a predicted recession – and are beginning to price it in.”
Next week’s Federal Reserve monetary policy meeting will now take center stage. Some investors anticipate that the Federal Reserve will delay its aggressive rate-hike campaign in an effort to reduce banking sector stress.
“The upheaval in the banking industry complicates the outlook for Fed policy, but the impact may be more subtle than a simple policy reversal,” said Philip Marey, senior U.S. strategist at Rabobank.
The index of the U.S. dollar fell 0.12% to 104.27.