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Dollar edges higher; still fragile as banking confidence improves

Published 03/29/2023, 03:00 AM
Updated 03/29/2023, 03:18 AM
© Reuters

By Peter Nurse - The U.S. dollar edged higher in early European trade Wednesday, attempting to arrest two days of losses, but this safe haven remained fragile given the growing confidence in the health of the global banking sector.

At 03:00 ET (07:00 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher at 102.328, after drops of about 0.3% in each of the past two sessions.

The index remains marginally above last week’s low of 101.91, its weakest level since early February.

Fed Vice Chair for Supervision Michael Barr told a Senate Banking Committee hearing on Tuesday that the U.S. system is “sound and resilient”, as he attempted to reassure investors that widespread contagion from the failure of a couple of regional banks was unlikely.

The regulator is expected Wednesday to continue into a second day of testimony on Capitol Hill, this time in the House.

However, attention is now turning back on whether the Federal Reserve policymakers will be sufficiently confident to continue their rate-hiking cycle in early May.

Bond yields rose overnight, helping the dollar, with the 10-year benchmark U.S. yield climbing to a fresh one-week peak, on rising expectations that the Fed will continue to raise interest rates.

That said, Federal Reserve Bank of Minneapolis President Neel Kashkari – one of the FOMC’s biggest hawks – warned earlier this week of the economic impact of a credit crunch, saying the recent bank turmoil has increased the risk of a U.S. recession.

“Since the Fed is not offering a hawkish narrative to lean on, market pricing of future rate moves remains strictly tied to news on financial stability,” analysts at ING said, in a note.

EUR/USD fell 0.1% to 1.0831, with German consumer sentiment set to nudge up in April, but by less than expected, according to data from the GfK institute on Wednesday.

The institute forecast its consumer sentiment index to improve to -29.5 heading into April from a revised reading of -30.6 in March, below the expected -29.0.

April's reading, rising for the sixth month in a row, shows sentiment is on its way towards recovery, GfK said, but the pace of growth has slowed noticeably.

GBP/USD fell 0.1% to 1.2328, largely keeping recent gains after Bank of England Governor Andrew Bailey sounded relatively hawkish about the importance of tackling inflation earlier this week.

“With BoE rate expectations now supported, we think GBP/USD can head towards the key 1.2426 (December high) and 1.2500 resistances on the back of USD weakness and policy divergence relatively soon,” ING added.

Risk-sensitive AUD/USD fell 0.4% to 0.6680 after softer-than-expected inflation data for February, USD/JPY rose 0.8% to 131.93, with the safe haven yen hit hard, while USD/CNY rose 0.2% to 6.8895, heading back towards the keenly-watched 7 level amid uncertainty over the strength of the Chinese economic rebound this year.

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