Dollar slips as bank lifelines shore up risk appetite

By Amanda Cooper

LONDON, (Reuters) – The dollar lost ground Friday after the top U.S. powers brokers, including the government as well as banks, gave a lifeline for a struggling regional lender to alleviate financial system stress. This restored confidence to investors.

On Thursday, First Republic Bank was saved in the U.S. and this boosted global risk appetite on Friday. As worries about global banks eased globally, there were surges in the Australian Dollar and New Zealand Dollar.

This week brings back memories from 2008, when dozens of financial institutions collapsed or were bailed by central banks and government money.

Three smaller U.S. banks have been rescued by regulators and other banks, while Credit Suisse in Europe became the first global bank to receive an emergency loan from the Swiss central banking since the financial crisis. This restored investor confidence and stopped a hemorhage of customer deposits.

Investors felt empowered to sell the safe-haven U.S. dollars, given the measures that were in place to help any lenders who are clearly in trouble and the assurances made by the European Central Bank about the strength of the euro zone’s banking system.

“As long as we don’t get any other negative headlines around the banking sector, or anyone collapsing, we might just see a bit of risk-on, equity heading higher, Treasuries giving up some of their gains and the dollar rolling over in a combination of a relief rally and a position-squeeze,” Michael Brown, TraderX strategist.

The U.S. dollar index dropped 0.2% to 104.07, mainly due to strength in the euro (yen) and the euro.

ECB HOLDS THE LINE

During this time, the European Central Bank (ECB), a substantial 50-basis point rate increase was announced at its policy meeting on Thursday.

Christine Lagarde (ECB President) tried to reassure investors that the banks of the euro area are resilient and that higher rates can help boost their margins.

Analysts said that if the ECB had decided to increase the rate, or even to keep it at the same level, investors would have been more worried and could have triggered a much larger sell-off.

Analysts said that although the money markets have a more positive outlook on interest rates than in recent times, core inflation is still increasing and being stubborn. This would make it difficult for the central bank not to increase rates.

In fact, Peter Kazimir, ECB policymaker, stated Friday that the bank must continue raising rates because of this.

The euro was up 0.3% at $1.0646 against the dollar, while the pound gained 0.2% to 87.75pence. The euro has fallen 0.8% against sterling so far this week and has not made any gains against the dollar.

Sterling rose 0.12%, to $1.21322, while the Swiss franc rose by 0.35%. The Swissie plunged against the dollar the most in one day since 2015 when the central bank loosen its currency peg.

The Japanese yen rose in response to market volatility and stress. The yen was at 133.13 dollars, up 0.5% in the last week. This is a weekly increase of 1%.

The Nikkei newspaper reports that Japan’s Ministry of Finance and Financial Services Agency will meet Friday night to discuss financial markets amid concerns about the U.S. banking crises.

The Australian dollar, which is often more successful when investors feel optimistic, rose 0.8% to $0.6707 while the kiwi rose 0.9% up to $0.625.

Now, the Federal Reserve’s next week monetary policy meeting is taking center stage. Investors are hopeful that the Fed might slow down its aggressive rate-hike campaign, in an effort to ease financial sector stress.

(Additional reporting by Rae Wee Singapore; Editing by Kirsten Dovan

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