The U.S. dollar mostly traded sideways on Tuesday as new data signaled cooling inflation and fading fears of volatility in the banking sector.
The dollar index, which tracks the greenback's performance against six peer currencies, saw a slight fall of 0.087 percent. The index rallied last week with the expectation of more rate hikes by the Federal Reserve.
The euro rose by 0.09 percent to $1.0739, but the greenback strengthened by 0.15 percent against the Swiss franc.
The dollar also gained against the yen, with the Japanese currency falling by 0.69 percent to trade at 134.13 per dollar.
The sterling was down 0.05 percent to $1.2175, despite rising by 1.22 percent on Monday. This decline followed a new report about the slowing growth of wages in the U.K. last quarter.
Meanwhile, the consumer price index for February showed an annual rate of six percent, a decline from the 6.4 percent growth in the month before. The month-over-month price growth also declined from 0.5 percent in January to 0.4 percent last month. The data aligned with analysts' expectations.
The situation in the banking sector also improved as the market stabilized in the aftermath of the high-profile shutdowns of Silicon Valley Bank (SVB) and Signature Bank last week. Wall Street rallied on Tuesday, with bank stocks generally posting gains.
These two developments are expected to influence the Federal Reserve's policy in its rate-setting meeting next week, with the central bank focusing more on the impact of its interest rate hikes on the banking system.
"Risk around bank lending is skewed to the downside," Thierry Wizman, a strategist at financial services firm Macquarie, said. "With the regulatory burden and the prospect of net interest margins at banks getting squeezed, you can make the case that it's only going get worse."
Australia's Westpac strategist Imre Speizer predicted that the U.S. dollar would not be "quite as strong" as last week. Speizer also said the peak interest rate in the U.S. would be lower than initially expected.
The market currently predicts the Fed to increase the interest rate by 25 basis points on March 22, with the rate peaking at 4.7 percent by May — investors initially projected an over 5.5 percent peak. Additionally, futures tied to Fed's policy forecast two rate cuts by the end of 2023.
The Fed began to raise the benchmark rate in March last year in an attempt to bring down inflation to the two percent target. Analysts have raised concerns about the possibility of the central bank pushing the U.S. economy into a recession due to significant rate increases in a short period.
Bond yields fall
Bond yields continued to fall on Tuesday. The two-year yield fell to 3.985 percent, while the 10-year notes declined to 3.513 percent.
On Monday, Treasury bond yields already saw steep declines. Two-year Treasury notes declined by 57 basis points to 4.02 percent, its biggest daily decline since the financial crisis in 2008. Meanwhile, the 10-year bond yield fell to 3.42 percent at one point.
Bond yields fall when the prices increase, indicating that there were more people purchasing bonds in the last two days. Analysts said the shutdowns of SVB and Signature still had an impact on the financial markets.
The yield curve between the two-year and 10-year notes remained inverted at 89.19 basis points, showing that the market still expected a recession to occur.