Dollar retreats, euro gains after Credit Suisse boosts risk sentiment

By Peter Nurse

Investing.com - The U.S. dollar retreated in early European trade Thursday and the euro pushed higher as Credit Suisse’s move to bolster its financial position boosted risk sentiment.

At 03:55 ET (07:55 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% lower at 103.980, handing back some of the previous session’s 1% gain.

Credit Suisse (SIX:CSGN) announced late Wednesday plans to borrow as much as CHF 50 billion ($1 = CHF 0.9297) from the Swiss National Bank, strengthening its liquidity position.

Worries have been growing about the Swiss lender’s financial health for some time as it struggled with hefty customer outflows in the wake of a string of scandals. These came to head on Wednesday with its share price slumping to a record low as its main investor, Saudi National Bank, said it was unable to provide more funding to the lender.

The news of this credit line has boosted sentiment, soothing some concerns over an immediate collapse in the sector that had been hit hard by the three recent U.S. bank failures.

EUR/USD rose 0.4% to 1.0619, bouncing on the news, ahead of the European Central Bank’s latest policy-setting meeting later in the session.

The ECB had previously signaled the likelihood of another interest rate increase of 50 basis points as underlying Eurozone remained elevated, but concerns about potential repercussions to the banking sector from such a hefty hike could prompt the policy makers to act more cautiously.

“The market will … take its cue from the European Central Bank today. Pushing on with a 50bp rate hike will prove difficult and we should expect more volatility immediately after the … decision,” said analysts at ING, in a note.

ECB President Christine Lagarde’s press conference will also be of interest as she is sure to be asked how the central bank can balance efforts to deliver price stability while safeguarding financial stability.  

The question is the same in the U.S., with the Federal Reserve likely to hold back from increasing interest rates by an outsized 50 basis points next week, given the strain on the U.S. banking system.

Goldman Sachs has lifted its estimate of the odds of a U.S. recession to 35% over the next 12 months in response to increased uncertainty over the economic impact of bank stress, an increase from 25% previously.

Elsewhere, GBP/USD rose 0.3% to 1.2105, boosted by the improved risk sentiment. Also helping was Chancellor Jeremy Hunt's comments in the budget on Wednesday that the economy was likely to shrink 0.2% in 2023, an improvement from the previous forecast for a 1.4% contraction. 

USD/JPY fell 0.5% to 132.69, with the yen one of the best performers of the day. The risk-sensitive AUD/USD rose 0.6% to 0.665670, while USD/CNY edged 0.1% lower to 6.9007.