Euro US Dollar Exchange Rate Fluctuates as US Banks Avert Financial Sector Collapse
The Euro US Dollar (EUR/USD) exchange rate is trading erratically on Friday amid a wavering market mood in the wake of the Fed’s $30bn bailout of regional US bank, First Republic.
At time of writing the EUR/USD exchange rate is trading around $1.0656, relatively unchanged from this morning’s opening levels.
US Dollar (USD) Undermined by Improving Risk Appetite
The US Dollar came under selling pressure in the aftermath of the First Republic Bank bailout. Late Thursday, the biggest banks in the US injected $30bn into the flagging regional bank, allaying a potential contagion throughout the banking sector.
The deal was announced late last night, and calmed investors’ jitters. US Treasury Secretary Janet Yellen reiterated her confidence in the banking systems, and reassured investors further:
‘We felt that there was serious risk of contagion that could have brought down and triggered runs on many banks. And that’s something, given that our judgement is that the banking system overall is safe and sound.’
However, despite narrowly avoiding a contagion in the banking sector, the ‘Greenback’ slipped when market sentiment improved with the news. After the European Central Bank (ECB) raised interest rates by 50bps, fears grew of further damages in the pipeline to the banking sector. However, the bailout allayed these fears, and global market moods improved, sapping demand.
Euro (EUR) Supported by Hawkish Return of ECB
Meanwhile, the Euro is trading in mixed directions today amid a fluctuating market mood. A lack of economic data is leaving the single currency exposed to external pressures. With the financial sector crisis temporarily averted, an improving market mood and elevated rate hike bets continue to support the Euro.
The ongoing volatility of the US and European banking sectors could be keeping a lid on gains today. Despite the bailout, concerns of further banks going under could be weighing on investors.
However, supporting the Euro are renewed hopes of further interest rate hikes from the ECB. In contrast to ECB President Christine Lagarde’s dovish speech that followed the rate decision, policymaker Peter Kazimir appeared hawkish in his remarks:
‘Even the current events on the financial markets do not change my view that we need to continue. I am very well aware of the delicacy of the situation… but we are not yet at the finish line.’
Euro US Dollar Forecast: Fed Interest Rate to Sink the Greenback?
Looking ahead to next week, the Euro US Dollar exchange rate could see further movement with the latest Fed interest rate decision. Amid the volatility of the financial markets, the Fed could choose to pause its rate hikes. If so, USD investors could be deterred, the ‘Greenback’ could plummet.
Meanwhile, the Euro will continue to trade on market sentiment, and in particular on the negative correlation it shares with the US Dollar. If the ‘Greenback’ weakens considerably, the Euro could enjoy an upswing.
