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13.03.2023 09:54 AM
SVB collapse: the dollar is confused

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During the weekend, the market was shocked by news about the Silicon Valley Bank bankruptcy. The strongest shock in the U.S. banking sector since 2008 was a logical consequence of the aggressive policy pursued in the country. It made investors doubt the Federal Reserve's hawkish resolve.

What happened to SVB?

Until recently, SVB was one of the top 20 largest U.S. banks by asset size. It was also one of the most active U.S. lenders to tech startups.

The collapse of SVB was reported last Saturday, March 11. The reason for the bankruptcy was the liquidation of Silvergate Bank. A similar credit structure, which also invested in startups, had folded a few days earlier.

The closure of Silvergate sowed panic in the market, as investors began to sell off industry stocks in droves and SVB customers began to withdraw their deposits.

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According to Bloomberg estimates, the SVB bankruptcy was the largest shock in the US banking industry in 15 years. And The New York Times called it the second largest collapse in American history.

Now analysts fear that the situation with SVB may provoke a wave of defaults of credit institutions across the country, which will lead to the collapse of the US financial system.

The first alarm bell came on Sunday, when New York state regulators closed Signature Bank.

How did the authorities react?

Yesterday, the US government announced the development of an urgent action plan aimed at supporting bank depositors and financial institutions that suffered from the SVB collapse.

Starting today, clients of bankrupt institutions will have to access their accounts. And the Fed will provide emergency financing to banks, savings and other credit institutions on relaxed terms – loans for up to 1 year.

For these purposes, the US Treasury Department will allocate up to $25 billion from its currency stabilization fund. US President Joe Biden stressed that this will help not only protect American workers and small businesses, but also ensure the security of the American financial system.

The Fed's emergency lending program is "an admission not only of systemic risk but that the risks are so unusual and exigent that failure to invoke this liquidity could create a financial crisis," said Peter Conti-Brown, associate professor at the University of Pennsylvania's Wharton School.

What will be the consequences of the SVB's collapse for the dollar?

"If you look at this situation more broadly, you will see that the SVB bankruptcy is nothing more than a side effect of the Fed's toughest monetary policy in the last 40 years," said Michael Feroli, chief economist at J.P. Morgan. The lender invested in long-term bonds, the market value of which fell as their profitability increased. Meanwhile, the bank's financing costs were rising, and the Fed continued to raise rates.

The SVB collapse forced investors to change their forecasts for further rate hikes. Now the market believes that in the current situation, the Fed will not want to rock the boat even more, even though inflation is still stable.

Tomorrow's US Consumer Price Index should have prompted the Fed to move along the hawkish path. Some market participants believed that a strong report could force US officials to act tougher and raise rates by 0.50% instead of 0.25% in March.

"However, given what has happened in the US financial system, at this stage a rate increase of 25 bps looks more likely than an increase of half a percentage point," Commonwealth Bank of Australia strategist Carol Kong said.

Goldman Sachs analysts are now following an even less hawkish scenario. They still expect to see a 0.25% increase in US rates in May, June and July, but have changed their forecast for the March Fed meeting.

According to experts, force majeure in the country's banking sector may force American politicians to pause in tightening. In this case, the dollar risks sinking even more.

The weakening of the hawkish market sentiment hurt the yield of 10-year US government bonds, which led to a large-scale sale of the greenback.

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The greenback started the new working week with a fall on all fronts. At the time of release, the DXY index declined by 0.3% against the basket of major currencies, falling below the 104 level.

Against the Australian dollar, the greenback sank 0.7% to 0.663. Its losses against the euro amounted to 0.4% (in the morning, EUR/USD was trading around 1.069). And in USD/JPY, the dollar fell 0.3% to 134.5.

Currently, traders estimate the probability of a 50 bps rate hike at the March FOMC meeting at only 17%. Recall that before the news about the collapse of SVB, the probability of such a scenario was about 70%.

If tomorrow's US CPI data turns out to be weaker than forecasts and indicates a disinflationary trend, this will further strengthen the market's opinion about a 0.25% rise in rates in March. This is an unfavorable factor for the dollar.

Аlena Ivannitskaya,
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