U.S. Dollar Index Experiences Growth
The U.S. dollar index, which compares the greenback to a trade-weighted basket of six major currencies, increased by 0.54% to 101.8 after reaching its lowest level since April 2022 on Friday.
Goldman Sachs Predicts Market Fork
Goldman Sachs stated that the market is currently pricing a narrow path of a small slowdown but more accommodative policy, which will likely reach a fork in the road soon.
Banking Crisis Fears Fuel Dollar's Decline
The dollar's recent slump to a one-year low was driven by expectations that the banking crisis would tighten lending standards and slow economic growth, prompting the Fed to intervene with rate cuts.
Crisis Fears Subside, Inflation Becomes Focus
However, fears that the collapse of Silicon Valley Bank and Signature Bank would trigger a systemic banking crisis have not materialized. Instead, attention has shifted to elevated inflation, likely to maintain higher interest rates for longer.
Goldman Sachs on Fed Officials' Concerns
Goldman Sachs added that while Fed officials expressed concern in March, more recent commentary has noted that the tightening in lending conditions appears mild. They continue to view bank failures as relatively idiosyncratic.
Reduced Borrowing Indicates Easing Turmoil
Data from last week showed that banks reduced borrowing from the Fed's emerging lending programs to $139.5 billion from $148.7 billion in the week ending April 12, indicating that turmoil in the banking sector has somewhat subsided.
Opposing Views on Dollar and Fed Actions
However, some still believe that concerns over the impact of tighter credit conditions will weigh heavily on the dollar. They point to a recent small business survey revealing signs of cracks in lending activity and cooling inflation data as reasons for the Fed to pause.
MUFG on Fed's Hiking Cycle
MUFG stated that these developments should give the Fed more confidence that it has already delivered sufficient rate hikes and can now pause its hiking cycle. In these circumstances, risks remain tilted to the downside for the USD.