Dollar Slips amidst US Banking Crisis

Dollar Slips amidst US Banking Crisis

The dollar slid on Monday as investors reacted to UBS’ takeover deal with rival Credit Suisse. The U.S. dollar index declined by 0.501% at 103.270 the day after the merger was announced, touching its lowest level since Feb. 15.

The acquisition of Credit Suisse by UBS, orchestrated by Suisse authorities no boost for sentiment amidst fear of spillover effect on the global economy.

While this surely offers a breather to global markets as a black swan scenario is ruled out, it came at a rather hefty cost for some categories of investors, which is ultimately showing its negative impact on markets this morning, ING Economic FX strategists said in a note.  

The acquisition price was CHF 0.76 a share, well below CS’s CHF 1.86 closing price on Friday, and around CHF 16bn worth of CS Additional Tier 1 capital bonds are being wiped out.

Other lenders’ AT1 bonds are coming under pressure this morning, bringing respective shares lower, on fear of contagion. In other words, black swan risks may be lower, but financial turmoil is not over.

This is one of the reasons why the Federal Reserve and five other central banks announced a coordinated action yesterday to provide extra liquidity to money markets by increasing the frequency of its USD swap lines operations from weekly to daily.

As noted by our rates colleagues here, this appears to be a purely precautionary measure by the Fed, considering that there was no material evidence of outsized demand for dollars last week.

There is currently $470 billion being drawn through swap lines, which is modestly higher than $390bn a month ago, but nothing compared to the $5tn seen at the peak of the pandemic shock.

UBS agreed to buy Credit Suisse on Sunday for 3 billion Swiss francs ($3.23 billion) and assume up to $5.4 billion in losses, in a shotgun merger engineered by Swiss authorities.

Meanwhile, growth assets such as bitcoin enjoyed a bounce. The world’s largest cryptocurrency hit a nine-month high on Monday and last rose 4.62% to $28,065.00. Also weighing on the dollar are concerns about regional U.S. banks, despite several large banks depositing $30 billion last week into First Republic Bank

FRC, the U.S. lender drawing the most unease from investors. First Republic shares tumbled as much as 50% on Monday and were last down about 39%. Under the UBS-Credit Suisse deal, holders of $17 billion of Credit Suisse Additional Tier-1 (AT1) bonds will be wiped out.

That angered some of the holders of the debt, who thought they would be better protected than shareholders and unnerved investors in other banks’ AT1 bonds.

The euro was last up 0.54% against the dollar at $1.0724, while the British pound was last trading at $1.2281, up 0.87% on the day. The dollar rose 0.24% against the Swiss franc at 0.928. # Dollar Slips amidst US Banking Crisis

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