Dollar Slumps and Asia FX Firms Amid SVB Turmoil and Rate Hike Outlook Uncertainty.
The Asian currency market experienced a positive start of the week as most regional currencies gained momentum, while the dollar dropped to its lowest level in nearly three weeks. This sudden market shift follows the potential banking crisis in the United States and uncertainty over more interest rate hikes by the Federal Reserve this year.
China’s yuan strengthened by 0.3%, moving away from the crucial 7 level. The government’s retention of key financial officials, along with assurances of more supportive measures for the economy from top officials, bolstered sentiment towards China. The offshore yuan also surged by 0.8%.
Other Asian currencies performed well, with South Korea‘s won leading the gains across the region with a 1.4% increase. The Japanese yen rose by 0.6%, while the Malaysian ringgit recorded a gain of 0.8%, leading the Southeast Asian currencies.
However, the Indian rupee struggled to keep up with its peers, hovering within a small range ahead of the release of crucial consumer price index inflation (CPI) data later in the day. Analysts expect price pressures to have increased in February from the prior month.
On the other hand, the dollar performed poorly against a basket of currencies, with both the dollar index and dollar index futures dropping by 0.7% and 0.6%, respectively. These instruments also hit three-week lows.
The Fed’s recent loosening of borrowing measures for banks after the failure of Silicon Valley Bank (NASDAQ:SIVB) has somewhat alleviated the inversion in the U.S. yield curve. The central bank announced that it will convene an emergency meeting on Monday.
Investors have lowered their expectations for a 50 basis point (bps) hike by the Fed next week and are now pricing in a higher likelihood of a 25 bps increase. SVB’s failure highlights the severe economic cracks caused by the sharp rise in U.S. interest rates, following the most aggressive tightening spree in 50 years by the Fed.
However, the market now speculates that the Fed may alter its hawkish rhetoric to avoid putting additional pressure on the banking system. Goldman Sachs analysts no longer expect the Fed to raise rates when it meets on March 22, and the outlook for future rate hikes is now uncertain.
Analysts at ING noted that turmoil in the U.S. banking sector has significantly diminished the possibility of a 50 bps hike next week, but a 25 bps raise remains a possibility. Additionally, the outlook for a U.S. rate hike was dampened by data released last week that showed a slight easing in wage growth. This week, the focus will be on a CPI reading for February.
In conclusion, the ongoing turmoil in the U.S. banking sector has led to a highly uncertain rate hike outlook, causing significant fluctuations in the Asian currency market. Investors are eagerly awaiting further developments to gain clarity on the future trajectory of U.S. interest rates.
