The U.S. dollar and Japanese yen gained on Tuesday amid declining risk appetite among investors due to the heightened risk of global economic contraction.
In the forex market, the U.S. dollar index, which tracks its performance against major peers, rose by 0.6 percent to 101.83 during the session. The index previously posted a four percent decline since early March.
The greenback strengthened over the euro, with the eurozone currency trading 0.7 percent lower to $1.0969. Euro has risen by 1.2 percent against the greenback so far in April. Sterling was also down 0.6 percent at $1.2403 but remained close to a 10-month high of $1.2545 hit earlier this month.
Ahead of the publication of Australia’s inflation data, the Aussie fell by 1.1 percent to $0.6621. Meanwhile, the New Zealand dollar tumbled 0.5 percent to $0.6138.
The Japanese yen strengthened by 0.6 percent to trade at 133.495 per dollar. It also gained 1.2 percent against the euro, trading at 146.42 after touching an eight-year low of 148.635 in Tokyo’s forex market earlier in the day.
Analysts said recent inflation data had increased the appeal of safe-haven currencies like the dollar and the euro. U.S. consumer confidence plunged to a nine-month low of 101.3 in April after hitting 104.0 the month before. The U.S. Richmond Federal Reserve manufacturing index also posted -10 this month, the fourth consecutive month of decline.
According to analysts, both surveys negated the favorable U.S. housing data, which showed new home sales rose by 9.6 percent in March, beating earlier estimates.
“Lower risk appetite is clearly the main driver here for the dollar and for other havens as well.”
Shaun Osborne, Chief FX Strategist at Scotiabank
Scotiabank chief FX strategist Shaun Osborne said although the indication of a weakening U.S. economy was the “main driver” of the dollar and yen rally, the recent rally might not be sustainable.
“But we’re not really breaking out in the dollar or extending significantly at this point,” Osborne said. “This is not a longer-term development, so we have to look at opportunities to fade the dollar rally.”
Effects of banking turmoil remain
In addition to weak economic data, signs that the banking crisis had not entirely subsided prompted investors to avoid risk-on assets. San Francisco-based lender First Republic Bank reported earlier this week that many clients withdrew their deposits, prompting its stock price to drop by nearly 50 percent.
After Silicon Valley Bank and Signature Bank imploded in March, analysts raised concerns that First Republic’s weak liquidity could make it follow its peers’ steps. First Republic has received liquidity support from larger U.S. banks to maintain its operations. The Fed also established an emergency lending program to support regional banks like First Republic.
Swiss banking giant UBS also reported a 52 percent decline in its quarterly income. Last month, UBS acquired its troubled rival Credit Suisse at a discounted price in a buyout deal engineered by the Swiss National Bank.
Analysts have warned that the turmoil in the banking sector may adversely affect the economy in the longer term. Banks will likely tighten their credit requirements to protect their liquidity, leading to difficulty in obtaining loans for businesses and households. The economy will experience the impact in the form of reduced productivity in various sectors and declined consumer spending.
Fed officials also acknowledged the risk of tighter loan conditions, especially given that the U.S. central banks had consecutively raised benchmark lending rates since March last year. Fed governor Christopher Waller said authorities would closely monitor the development in the financial sector before deciding on the next rate policy. Nevertheless, Waller said he was in favor of further rate hikes because inflation was still well above the two percent target.