Dollar slumps, rate hikes in question as Fed limits SVB fallout

© Reuters.

By Ambar Warrick

Investing.com -- The dollar fell sharply against a basket of currencies on Monday as markets reassessed their outlook for future interest rate hikes by the Federal Reserve, amid growing expectations that the central bank will reconsider its hawkish rhetoric in the face of a looming banking crisis. 

Traders were now pricing in a greater chance that the Fed will raise rates by 25 basis points bps when it meets next week, a sharp reversal in the 50 bps expectations being priced in earlier. The trend comes as the collapse of Silicon Valley Bank (NASDAQ:SIVB) highlighted the deepening economic cracks caused by a sharp increase in interest rates over the past year.

The dollar weakened sharply against a basket of currencies, with the dollar index and dollar index futures down 0.7% and 0.8%, respectively. The two were trading at over two-week lows.

Short-term Treasury yields also plummeted from recent highs, while long-term yields firmed on the prospect of a potential pause in further interest rate hikes.  

The U.S. Treasury and the Fed had over the weekend announced emergency funding measures for the banking sector, after the sudden collapse and regulatory seizure of SVB last week. 

The White House also said it will ensure that depositors in the bank are made whole, and that SVB customers will have access to their deposits starting Monday. 

But markets now questioned the scope for further monetary tightening in the U.S., given that more rate hikes are likely to cause more economic damage.

Goldman Sachs analysts said that they no longer expect the Fed to hike rates this month, and expressed uncertainty over the path of monetary policy given the recent stress on the banking sector. 

Analysts at ING said that a 50 bps hike when the Fed meets on March 22 appeared unlikely, but said that a 25 bps raise was still on the cards. 

The Fed will convene for an emergency, closed-door meeting later on Monday, the results of which are expected to provide more insight on the central bank’s actions going forward.

Focus this week is also on consumer price index inflation data for February, after jobs data released last week showed some cooling in wage growth.