Powell-led Dollar Surge Vanishes Amidst Banking Sector Turmoil

(RTTNews) - The Dollar's surge in the week spanning March 3-10 triggered by the warnings of higher interest rates by Jerome Powell in his semi-annual monetary policy report to the Congress, drained in the unprecedented turbulence that engulfed the banking sector soon after.

The Dollar Index (DXY) which measures the Dollar's strength against a basket of six currencies opened the week at 104.53, practically unchanged from the close of 104.52 on March 3.

Jerome Powell in his Semi-annual Monetary Policy Report on Tuesday before the Senate Committee on Banking, Housing, and Urban Affairs had stated that the ultimate level of interest rates was likely to be higher than previously anticipated. Powell also warned that if the totality of the data were to indicate that faster tightening was warranted, the Fed would be prepared to increase the pace of rate hikes. Restoring price stability, he added, would likely require maintaining a restrictive stance of monetary policy for some time. The Fed Chair also warned that the historical record cautioned strongly against prematurely loosening in policy and that the Fed would stay the course until the job was done.

The Fed Chair reiterated his warnings on Wednesday in the testimony before the House Committee on Financial Services. The aggressive warnings lifted the DXY to a three-month high of 105.88 by the close of Wednesday.

Close on the heels of the collapse of crypto-focused Silvergate Bank, shares of California-based SVB Financial Group (SIVB), the holding company for tech-focused Silicon Valley Bank plunged on Thursday after it warned of a huge loss triggered by sale of securities. Amidst a scramble by depositors to withdraw deposits, the California Department of Financial Protection and Innovation on Friday ordered the closure of Silicon Valley Bank and appointed the Federal Deposit Insurance Corporation or FDIC as receiver.

The developments that rocked the banking sector in the U.S. called into question the impact of rate hikes by the Fed. With the increase in interest rates, the marked-to-market losses on the longer-term maturity assets acquired by banks when interest rates were lower has been swelling, which FDIC has estimated to be around $620 billion at the end of 2022 and has reduced the reported equity capital of the banking industry.

Amidst assessment that the banking crisis and the feared contagion could goad the Fed to tone down its aggressive stance, the Dollar retreated, and the Dollar Index touched the week's low of 104.04 on Friday, before rebounding and closing the week at 104.58. DXY edged up 0.05 percent in the past week.

Uncertainty over monetary policy in the U.S however remains as data released on Friday had shown the U.S. economy added 311 thousand jobs in the month of February. Markets were expecting an addition of 205 thousand jobs versus 504 thousand in the month of January.

The euro strengthened around 0.10 percent to the U.S. Dollar in the week ended March 10, helped by ECB's Christine Lagarde's hawkish comments on further interest rate hikes. The EUR/USD pair finished trading at 1.0643, versus 1.0632 on March 3. The euro had weakened to a low of $1.0524 on Wednesday in the aftermath of the Powell testimony, but strengthened all the way to $1.0702 as banking sector woes unfolded in the U.S.

The pound weakened around 0.10 percent to the Dollar over the course of the past week. The GBP/USD pair which was at 1.2040 on March 3 dropped to 1.2028 in a week's time. The pair's moves during the week were largely correlated, though inversely to the Dollar's response to Fed Chair Powell's testimony and banking sector developments. GDP data that showed the British economy grew 0.3 percent month-on-month in January versus market expectations of 0.1 percent provided limited support to the sterling.

The dollar weakened around 0.65 percent to the yen over the course of the week. The USD/JPY pair slipped to 134.98 on March 10, versus the close of 135.86 on March 3. The pair touched a high of 137.92 on Wednesday amidst the Dollar's surge and weakened to 134.11 as the Dollar retreated. During the week, The Bank of Japan had, as widely expected held interest rates steady, amidst a slowing wage growth and stagnating economic growth in the fourth quarter that eased pressure on it to raise rates.

The AUD/USD pair depreciated around 2.8 percent during the week ended March 10, even though the Reserve Bank of Australia raised rates by 25 basis points as expected. From 0.6768 on Friday, March 3, the pair dropped to 0.6577 on March 10, after touching a high of 0.6773 and a low of 0.6564. RBA's view that inflation had likely peaked and the Chinese government setting a less-than-expected GDP target of 5 percent for 2023, both dampened sentiment for the Australian Dollar.

Markets worldwide are currently watching with angst and anxiety the developments in the banking sector in the U.S. Despite the swift rescue measures initiated, the sentiment has not yet been restored after what can in all likelihood be termed as a black swan event. The DXY has dropped further to 103.72, lifting the EUR/USD to 1.0714, the GBP/USD to 1.2117 and the AUD/USD to 0.6668. The USD/JPY pair has also fallen to 133.00.

As policy makers and regulators scramble to assure markets, investors and depositors that all is well, the lingering question remains as to whether the crisis will put the brakes on Fed's aggressive rate hikes. Amidst the looming contagion, Friday's data that showed an increase in the unemployment rate to 3.6 percent and the expected fall in inflation are perceived as slowing the Fed's hands. The CPI for February due on Tuesday, is seen falling to 6 percent from 6.4 percent earlier.