US Dollar Dips as the Fed Ponders the Inflation Versus Bank Crisis Dilemma

US Dollar, DXY Index, Yellen, Fed, FOMC, SVB, Volatility, MOVE, VIX – Talking points

• The US Dollar spilled lower again despite the shoring up of bank deposits
• Treasury yields went higher but they have not been able to assist USD
• If the Fed puts the banking crisis ahead of inflation, will the DXY index go lower?

The US Dollar is languishing on Wednesday despite Treasury yields ticking up in the North American session and ahead of today’s Federal Reserve rate decision. The DXY (USD) index has sunk to its lowest level since mid-February near 103.

Expectations of a rate move at the Federal Open Market Committee (FOMC) meeting moved slightly toward a 25 basis point hike. Although it is still not fully priced in with the interest rate market weighing the probability of such a move to be around 75%.

The Fed is caught between continuing the fight on problematic inflation and an unfolding banking crisis.

Overnight, the greenback appears to have been undermined by an improvement in risk sentiment that had been under pressure in the wake of the collapse of SVB Finacial.

Treasury Secretary Janet Yellen reassured depositors in US banks overnight. She said that insurance would be provided if other small institutions found themselves in trouble with runs-on deposits.

While the comments may have been a step toward restoring confidence in the banking sector, some cynical market participants have interpreted the comments as indicating that more small and regional banks could surface with issues.

Nonetheless, equity markets, high beta currencies and Treasury yields marched higher into the New York close. Unusually, the US Dollar failed to make headway when yields rose. Bond and equity market volatility eased as shown by the MOVE and VIX indices respectively.

US DOLLAR (DXY), US 2- AND 10-YEAR YIELDS, MOVE INDEX AND VIX INDEX

Chart Created in TradingView

DXY (USD) INDEX TECHNICAL ANALYSIS

The DXY index broke above a short-term descending trend line last month but remains in an overall descending trend channel

Since the collapse of SVB Financial, the DXY index has been moving lower and support might be at the recent lows of 102.64 and 102.59 ahead of the prior lows of 100.82 and 99.57.

On the topside, the triple tops seen in the 105.63 – 105.88 area may provide a resistance zone. The previous peaks 107.70 and 1.08.00 could offer resistance ahead of the breakpoints at 109.37 and 109.54.

— Written by Daniel McCarthy, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @DanMcCathyFX on Twitter