Dollar retreats as banking sector fears fade

© Reuters. FILE PHOTO: U.S. dollar banknotes are displayed in this illustration taken, February 14, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

By Saqib Iqbal Ahmed

NEW YORK (Reuters) - The U.S. dollar fell against a basket of currencies for a second straight day on Tuesday as easing worries about a banking crisis revived investors' appetite for riskier currencies.

Investors took solace from First Citizens BancShares' agreement to buy all of failed lender Silicon Valley Bank's deposits and loans, and the fact that no further cracks have emerged in global banking in recent sessions.

The dollar index, which measures the currency against six rivals, was 0.31% lower on the day at 102.43, inching closer to the near seven-week low of 101.91 touched on Thursday.

The Australian dollar, seen as a liquid proxy for risk appetite, was 0.77% higher at $0.67025, getting a lift from better-than-expected retail sales data.

"There's definitely a positive bias to trade today," said TraderX strategist Michael Brown in London.

"I think it's a case of 'no news is good news' on the banking breakdown front, which is helping to steady a few nerves," Brown said.

The euro climbed to a five-day high against the greenback as euro zone government bond yields rose on Tuesday.

The dollar found little support from data on Tuesday that showed the U.S. trade deficit in goods widened modestly in February as exports declined, potentially setting up trade to be a drag on economic growth in the first quarter.

The yen rallied despite traditionally also being a safe haven, with analysts pointing to a pickup in flows ahead of the end of Japan's fiscal year on Friday.

The dollar fell as low as 130.415 yen, and was last off 0.60% at 130.795 as the Japanese currency rose. That undid most of the dollar's 0.64% jump against the yen in the previous session, which tracked a large rise in U.S. government bond yields.

Analysts said Japanese companies were likely to be selling foreign bonds to bolster their balance sheets.

"The time of the year - the Japanese fiscal end - I think there are some flows from Japanese repatriating," said Bart Wakabayashi, branch manager at State Street (NYSE:STT) in Tokyo.

"If that's it, it's pretty much a one-off, and then we'll get back to basics, which is essentially following yields."

TraderX's Brown warned that the dollar's recent sell-off may have been overdone - the greenback has slipped more than 3% from its March highs against a basket of currencies.

"The market appears to have moved too far, too fast in its dovish repricing of the FOMC outlook, particularly when policymakers are adamant that (interest rate) cuts won't occur this year," Brown said.

"If the banking crisis subsides, as it appears to be doing so, this should embolden the Fed to retain their hawkish stance, boosting the USD," he said.

Last week, the Federal Reserve's Federal Open Market Committee raised interest rates by 25 basis points, as expected, but took a cautious stance on the outlook because of the banking sector turmoil. However, Fed Chair Jerome Powell kept the door open for further rate rises if necessary.

Sterling was 0.4% higher on the day, hovering around a two-month high as the Bank of England said Britain was not experiencing stress linked to the demise of Silicon Valley Bank and Credit Suisse.

In cryptocurrencies, bitcoin rose 0.81% to $27,362, recovering from the a 3% slide in the previous session following problems at the world's biggest cryptocurrency exchange, Binance.

The company and its founder have been sued by the U.S. Commodity Futures Trading Commission (CFTC). The exchange also suffered a technical glitch on Monday that forced it to temporarily suspend some operations.