USD Hangs in the Balance: Bank Chaos vs. Inflation

TVC:DXY   U.S. Dollar Index
The US Federal Reserve is about to begin its two-day policy meeting and will announce its latest interest rate decision 48 hours later. During the meeting, officials will weigh the possibility of raising interest rates due to inflation, which is still considered high, or whether the current turmoil in financial markets should be given more weight. Unfortunately, the pre-meeting blackout period prohibits officials from commenting on the situation.

UBS shares, which had dropped over 14%, managed to recover by closing 1.2% higher after the bank provided a 3 billion Swiss franc ($3.2 billion) emergency rescue package for its troubled domestic rival, Credit Suisse. The large size of Credit Suisse's balance sheet, which stands at around 530 billion Swiss francs as of the end of 2022, is a concern for the global banking system, as it is twice the size of Lehman Brothers' when it collapsed in 2008.

The Federal Reserve, in response to the Credit Suisse crisis and the failures of a few US regional banks, has begun offering daily currency swaps to central banks in Canada, Britain, Japan, Switzerland, and the euro zone in order to ease funding stress in global markets.

With all this going on, traders are uncertain whether the Federal Reserve will raise its benchmark policy rate on Wednesday (US time). The dollar index fell below 103.5 on Monday for the third session in a row as investors anticipate that the Federal Reserve might not increase rates as much as previously expected due to the banking crises.

Fed funds futures reflect a 70% probability of a quarter-percentage point rate hike, with a 30% chance of no change. A significant drop in near-term inflation expectations is also contributing to the expectation of the Fed pausing its rate hikes, as expectation for the near-term inflation reached nearly a two-year low last month.

In other news, oil prices declined to their lowest point in 15 months on Monday due to concerns that the risks in the global banking sector may lead to a recession. Gold prices, which had surged 6.4% in the previous week, fell to $1,980 an ounce on Monday but remained close to the one-year high of $2,009 hit earlier in the session.

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