The dollar steadies as banking crisis fear ebb, while Euro gains strength ahead of the ECB meeting

The dollar is attempting to stabilize on Wednesday as investors dial back on their bets on U.S. rate cuts, and fears of a banking crisis subside. Meanwhile, the Euro remains on a firm footing, with a looming hike in Europe as the European Central Bank (ECB) meets on Thursday, and markets expect a 50 basis point hike, a more hawkish stance than traders expect from the U.S. Federal Reserve next week.

Euro on firm footing with looming ECB hike

The Euro touched a month-high of $1.0760 in the Asia session, before drifting back to flat at $1.0744. Markets believe the expected 50 basis point hike during the ECB meeting could be more hawkish than the U.S. Federal Reserve's stance next week.

Dollar rebounds on Wednesday

The last few days' selling pressure on the dollar seems to be abating. The dollar rose 0.4% to 134.72 yen, even with the biggest pay increases in a quarter-century that are likely to pressure monetary policy settings in Japan. Recent rallies in sterling, Scandinavian currencies, the Australian dollar, and the New Zealand dollar also seemed to lose steam but without really giving back any ground.

Banking stocks bounce, bonds and interest rate futures give back some gains

Banking stocks bounced, and bonds and interest rate futures gave back some of the huge gains they logged following the collapse of three U.S. banks in a matter of days. When all the dust clears, I think we'll end up with a dollar not being quite as strong, and the flow of data will probably resume centre stage. We end up with a lower Fed peak than was priced a week ago, and all else equal, that should result in the U.S. dollar which is a bit weaker than where it was a week ago.

Interest rate futures pricing implies an 80% chance of a U.S. rate hike

Interest rate futures pricing now implies an 80% chance of a 25 basis point U.S. rate hike next week. That is a lot more dovish than a week ago when markets priced a similar chance of a 50 basis point hike, but it is also a lot more hawkish than a day ago when crisis fears had traders pricing a 50% chance of a hold and steep cuts later in the year. U.S. consumer prices also increased solidly in February, keeping the pressure on policymakers to contain inflation.

The Sterling, New Zealand dollar, and Aussie remain steady

Sterling, up about 1% for the week, steadied at $1.2149. The New Zealand dollar dipped 0.4% to $0.6210, and the Aussie, up 1.5% for the week so far, was flat at $0.6679 as investors caught their breath. Together with steadier stock markets and relative calm in bonds, the moves suggest the immediate fears of contagion in the U.S. banking system have reduced following the failure of Silicon Valley Bank (SVB) last week.

Strong performance by the Swiss franc shows elevated market concerns

The strong performance this week, however, for the safe-haven Swiss franc, which is up more than 3% in five days, shows the elevated levels of concern in markets.

Mixed Chinese economic activity indicators

Chinese economic activity indicators came in mixed in the Asia session, with retail sales strength extending, but property investment falling. It gave a brief boost to the Australian dollar that soon faded, while the yuan inched lower.