The dollar edged higher as risk sentiment soured in Europe on returning banking worries, while the euro slipped even as policymakers left the door open to a 50 basis point rate hike at next week’s European Central Bank meeting.
The U.S. dollar index was last up 0.05% at 101.40 in a flight to safety as worries about the health of the financial system resurfaced following earnings from First Republic Bank and UBS.
News on Monday of plunging deposits at First Republic Bank served as a reminder that stability risks have not entirely died down, while UBS reported a 52% slide in quarterly income as it prepares to swallow fallen rival Credit Suisse.
Safe haven currencies, such as Japan’s yen, also firmed on Tuesday, even as the Bank of Japan’s new governor Kazuo Ueda signaled he was not in a hurry to shift policy. This week’s BOJ meeting, which concludes on Friday, is his first in charge.
The yen rose 0.25% to 133.88 per dollar.
“You need to respect the guidance that Ueda is giving, that we won’t see any changes on Friday. But I think tightening will come from the BOJ, maybe in June or July, because inflation is well above target,” said Jens Nærvig Pedersen, director, FX and rates strategy at Danske Bank.
“I see a prospect for a stronger yen on the back of monetary tightening in Japan but also because we’re reaching the end of the tightening cycle in the U.S.,” he added.
The euro was down around 0.2% against the dollar but still holding above $1.10, having risen 1.7% so far in April and over 4% since the beginning of March.
“The euro has performed well against most currencies recently because of the optimism around the outlook for the euro zone economy and the market anticipating more rate hikes from the ECB,” Danske Bank’s Pedersen said.
ECB board member Isabel Schnabel told Politico that a 50 bp rate hike was not off the table and would depend on data - notably inflation figures due two days before May’s meeting.
French ECB policymaker Francois Villeroy de Galhau seemed to have a different view, calling for further hikes to be limited in number and size in an interview with Le Figaro, but markets have focused on the fact that still more hikes are expected.
Futures pricing implies about a 2/3 chance of a 25 bp ECB hike and a 1/3 chance of a larger 50 bp rise.