Asian currencies remained restrained amidst renewed apprehensions about the banking crisis in the U.S. and Europe.
In response to concerns about a possible economic downturn, investors gravitated toward secure currencies. The Japanese yen, in particular, was a top performer, surging 0.5% and staying near its highest point in a month.
Meanwhile, the Thai baht, which is considered a reliable option among Southeast Asian currencies with higher risk, made progress by 0.4%.
Goldman Sachs’ revised forecast of 6% growth for the Chinese economy in 2023, up from the government’s 5% projection, failed to have a significant impact on the Chinese yuan, which remained steady.
This positive outlook generated some optimism for China’s economic recovery as the country emerges from a prolonged period of COVID-related lockdowns.
However, the yuan’s progress towards the key 7 levels against the dollar was hindered by weak risk sentiment.
A Domino Effect in the FX World
On Wednesday, apprehensions about a potential banking crisis resurfaced due to the drop in the shares of Credit Suisse Group AG.
The Swiss lender’s troubles were eased by the securing of a $54 billion credit line from the Swiss National Bank, calming some concerns over an immediate collapse in the banking sector.
Despite the Swiss National Bank’s efforts to alleviate banking crisis concerns, Asian currencies remained subdued as investors opted out of risk-heavy assets.
On Thursday, most regional currencies traded cautiously, with the Malaysian ringgit experiencing the biggest loss of 0.6%.
While the dollar slightly dipped against a basket of currencies, it still held onto its robust overnight gains. The US Dollar Index and dollar index futures both saw a 0.1% decrease after surging 1% in overnight trading.
The greenback’s strength was largely attributed to safe-haven demand and the increase in uncertainty regarding the U.S. monetary policy’s direction.
All eyes are now on the upcoming Federal Reserve meeting where a 25 basis point interest rate hike is expected.
Regional U.S Banks Collapsing – What Could it Mean?
The collapse of three regional U.S. banks sparked concerns of an impending banking crisis, leading traders to question the Federal Reserve’s capacity to continue raising rates.
The resulting losses in the dollar earlier this week brought some relief to Asian currencies. Meanwhile, attention was also focused on the European Central Bank’s upcoming interest rate decision
This is anticipated to result in a 50 basis point rate increase later in the day. This announcement caused the euro to surge by 0.3 percent in Asian trade.
The Australian dollar was one of the few exceptions for the day, increasing around 0.4 percent as a result of stronger-than-expected employment data. This development heightened expectations of more interest rate hikes.
What Could the Potential Consequences be?
According to many people in the forex world, the ideal outcome would be for the proceeds from the asset sale to cover the withdrawals, which would reassure investors.
Some individuals have suggested that the federal government may need to intervene and bail out SVB in order to maintain market confidence.
The banking index experienced a significant drop to its lowest level in three years, sparking a shift towards safe-haven assets, due to concerns that this situation may only be the beginning.
The sudden increase in interest rates has left banks that hold low-yielding bonds in a vulnerable position, as they cannot be sold without incurring substantial losses.
This means that if numerous customers decide to withdraw their funds, the bank may be forced to sell assets at a loss.
Although the Silicon Valley Bank is not large enough to trigger a Lehman moment, the unexpected event has the potential to prompt a re-evaluation of the banking sector’s stability.
The way in which the Silvergate and SVB predicament plays out in the upcoming days could be critical in determining whether the market becomes more risk-averse or not.