The U.S. Dollar Edged Higher and What is the Reason

The U.S. dollar advanced in early European trade, with safe-haven demand amid ongoing banking volatility and ahead of a Federal Reserve policy meeting scheduled for this week.

The dollar index traded up 0.1% at 103.470. The dollar decreased in value during the night following the revelation of emergency liquidity actions by prominent central banks in order to modify the financial system. This was followed by an emergency rescue of Credit Suisse with Swiss authorities orchestrating rival UBS’s takeover of the banking giant.

However, tensions are not over in the banking sector, especially in the debt market, given that UBS is writing down $17B worth of Credit Suisse bonds. Investors are nervous ahead of this week’s Federal Reserve meeting.

Expectations are now high that the U.S. central bank will cut interest rates by just 25 basis points, given the volatile situation in the banking sector.

However, there remains much confusion about what signals the Fed will send to markets given the current crisis and inflation.

Euro weakens pre-ECB report; other currencies

EUR/USD was down 0.1% at 1.0658, ahead of ECB President Christine Lagarde’s report in the session as she appears before the EU Parliament’s Committee.

The EU Central Bank raised interest rates by 50 basis points last week, and a governing council member said on Monday that the decision reflected the institution’s confidence in the region’s banks and their capabilities.

GBP/USD rose 0.2% to 1.2194, with the Bank of England expected to increase interest rates later this week. The central bank faces the challenging task of addressing inflationary issues while also being mindful of possible financial distress.

The AUD/USD didn’t change and was at 0.6695, while the NZD/USD dropped to 0.6258. USD/JPY, meanwhile, decreased by 0.5% to 131.13, bolstered by its safe-haven status. Still, some expressed concern over the continued imbalance in the yield curve that its policies have caused.

USD/CNY rose to 6.8892 after the People’s Bank of China suddenly cut reserve requirement ratios for local lenders, easing liquidity conditions.