The dollar tumbled against a basket of currencies on Monday as the Federal Reserve faces growing pressure to reconsider its hawkish rhetoric in the face of a banking crisis. The collapse of Silicon Valley Bank (NASDAQ:SIVB) has highlighted the deepening economic cracks caused by a sharp increase in interest rates over the past year, forcing traders to reassess their outlook for future rate hikes.
Earlier, markets had priced in a 50 basis points increase in interest rates by the Fed at its next meeting. However, traders are now expecting a 25 basis points hike, a sharp reversal in expectations that is causing the dollar to weaken against other major currencies.
The dollar index and dollar index futures fell by 0.7% and 0.8%, respectively, reaching over two-week lows. The trend reflects market uncertainty and growing concerns about the impact of a banking crisis on the economy.
As the Fed’s hawkish rhetoric faces potential reversal, traders are closely watching economic indicators, including inflation data due later this week. Any signs of stubborn inflation could give the Fed more impetus to raise interest rates. However, the collapse of two big US regional banks has eroded expectations that the greenback could resume a new rally to fresh 20-year highs.
The collapse of Silicon Valley Bank (NASDAQ:SIVB) and Signature Bank (NASDAQ:SBNY) has forced the US bond markets into a near 180-degree turn from pricing in a more aggressive Federal Reserve. Since Thursday, the tumble in short-term US Treasury yields, which were at 15-year highs, was the steepest since October 1987, and pulled the dollar down from three-month highs.
On Monday, two-year yields fell as low as 3.939%, down more than a percentage point from a 15-year high of 5.084% reached last week, while 10-year yields dipped to 3.418%, from more than 4% last week. These trends reflect the market’s growing uncertainty and fears of a looming banking crisis.
In conclusion, the dollar’s recent decline against a basket of currencies is a reflection of the market’s reassessment of future interest rate hikes by the Federal Reserve. With a banking crisis looming, traders are closely watching economic indicators and awaiting the Fed’s decision at its next meeting.