Dollar edges lower; safe haven loses appeal as banking turmoil eases

© Reuters.

By Peter Nurse

Investing.com - The U.S. dollar drifted lower in early European trade Tuesday as returning confidence in the global banking sector weakened demand for this safe haven.

At 04:00 ET (07:00 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower at 102.320.

The S&P 500 banks index rose 3.1% on Monday, helped by the news that First Citizens BancShares (NASDAQ:FCNCA) would acquire the deposits and loans of Silicon Valley Bank, which failed earlier this month, as well as reports from Bloomberg that U.S. authorities were considering more support for banks.

Signs of stability in this crucial sector have reduced demand for the dollar, usually regarded as a safe haven in times of stress.

The dollar index had climbed to a three-month high of 105.88 on March 8, before sliding as low as 101.91 last week as risk sentiment fluctuated with the differing banking headlines.

The turbulence in the banking sector has also changed the market’s expectation of the Federal Reserve’s likely interest-rate hiking path, with a pause in May now widely expected.

“Markets have turned increasingly doubtful that the Fed will be able to tighten policy any further, and have simultaneously speculated on an early start to the easing cycle,” said analysts at ING, in a note. “Fed Funds futures currently price in only a 30% chance of a rate hike in May while fully pricing in a 25bp cut in July, and a total of 80bp of easing by year-end.”

Elsewhere, EUR/USD rose 0.2% to 1.0817, with European Central Bank officials keen to emphasize not only the continued need to tackle inflation but also the underlying strength of the region’s banks.

Governing Council member Mário Centeno said Monday that the European Central Bank must consider recent financial-market stress when making decisions on interest rates, but “our main focus right now is to control inflation and to bring it down to 2%.”

French business confidence remained healthy in March despite the recent turmoil in the banking sector, according to data released Tuesday, and this follows on from German business morale unexpectedly rising in March.

GBP/USD rose 0.3% to 1.2321, maintaining recent strength after Bank of England Governor Andrew Bailey said on Monday that inflation remained the main driver of monetary policy decisions.

Data from the British Retail Consortium, released early Tuesday, showed that overall shop price inflation rose to 8.9% in March from 8.4% in February, the largest increase since its records started in 2005.

Risk-sensitive AUD/USD rose 0.6% to 0.6689, USD/JPY fell 0.5% to 130.92, with the yen seen benefiting from some consolidation of overseas profits by Japanese firms ahead of the end of Japan’s financial year on Friday.

USD/CNY fell 0.1% to 6.8816, with the focus on the release of Chinese business activity data later this week to provide clues of the state of an economic recovery in the country.