SINGAPORE : The U.S. dollar was on the front foot on Thursday as receding concerns over the banking sector helped improve risk sentiment, with investors switching their attention to the Federal Reserve’s battle against inflation.
The dollar index, which measures the currency against six major peers, rose 0.097 per cent at 102.73, after gaining 0.19 per cent overnight. The index though was on course to clock a 2 per cent decline for March due to market tumult induced by problems in the banking industry.
“The broader risk sentiment appears sustained as bank contagion concerns continued to fade and a rally in China equities grabs some attention,” said Christopher Wong, a currency strategist at OCBC in Singapore.
“While risk sentiment somewhat continued to hold up this week, we expect month-end flows alongside risk-on, risk-off flows to drive two-way trade.”
Banking stocks were battered in the past few weeks in the wake of the sudden collapse of two U.S. lenders and the rescue of Credit Suisse, with the dollar under pressure over fears that the Fed may have to relent in its fight against inflation and pause rate hikes.
But with no further signs of cracks in the financial sector and steps taken by regulators, investor nerves have been calmed for now. Focus has switched back to what the Fed is likely to do at its next meeting in May.
Markets are pricing in a 60 per cent chance of the Fed standing pat on interest rates, according to CME FedWatch tool.
“With recession fears fading off, the market’s focus is now turning to the upcoming U.S. PCE data later this week, which is seen as the Fed’s favourite inflation parameter,” said Tina Teng, a market analyst for CMC Markets.
“Caution still needs to remain in the mind as the Fed may not be as market-friendly as thought if inflation does not pave the way.”
The euro was down 0.13 per cent to $1.0829, but was on track to end the month with a 2 per cent gain. Sterling was last at $1.2297, down 0.11 per cent, after slipping 0.2 per cent on Wednesday.
The Japanese yen strengthened 0.05 per cent to 132.77 per dollar, after falling 1.5 per cent overnight. The currency has been volatile in the run-up to the end of the Japanese fiscal year on Friday.
The Australian dollar fell 0.21 per cent to $0.667, while the kiwi fell 0.22 per cent to $0.621.
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