The dollar fell on Monday as markets bet the Federal Reserve will be less aggressive in raising interest rates to curb inflation after U.S. authorities stepped in to limit the fallout from the sudden collapse of Silicon Valley Bank.
President Joe Biden said the administration's swift actions on Sunday to ensure depositors can access their funds in SVB and Signature Bank should give Americans confidence that the U.S. banking system was safe.
The Fed on Sunday announced it would make additional funding available through a new Bank Term Funding Program, which would offer loans of up to one year to depository institutions, backed by Treasuries and other assets these institutions hold.
The dollar index, which measures the greenback against six other currencies, fell 0.91% to 103.63 as short-dated Treasury yields tumbled.
The two-year note's yield plunged 48.9 basis points to 4.099% in the biggest one-day drop since the financial crisis of 2008. The note was on track for its biggest three-day decline since the Black Monday crash of 1987.
"The financial crisis is cutting short monetary tightening. There's a big shift in rate expectations," said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.
"The markets already is pricing in a cut again in Q4," he said.
Fed funds futures also tumbled, with expectations of the Fed's terminal rate sliding to 4.05% in December from above 5% on Friday.
Goldman Sachs, among other big banks, said it no longer expects the Fed to deliver a rate hike at the end of its two-day policy meeting on March 22.
Barclays said that the latest bout of financial market jitters introduced significant uncertainty into the market and that policymakers will pause at next week's meeting.
Futures showed a 32.8% chance of no increase in rates at next week's meeting, according to CME's FedWatch Tool.
"The biggest fear right now is contagion. Contagion is underpinned by fear and panic, and that's more difficult to control than providing liquidity and covering depositors," said Quincy Krosby, chief global strategist at LPL Financial in Charlotte, North Carolina.
CPI in focus
With speculation rampant on how the Fed will handle monetary policy and fight to rein in inflation, the focus is the release on Tuesday of the consumer price index (CPI) data.
"There's been a radical change in interest rate expectations and in that scenario the dollar has weakened," said Niles Christensen, chief analyst at Nordea.
If concerns over the U.S. banking system are contained and do not spread, "expectations for rate hikes should be revived quickly," he said.
Safe-haven currencies, such as the Japanese yen and Swiss franc, benefited from the fallout from SVB.
The dollar was down 1.25% to the yen at 133.29 and fell 1.09% against the Swiss franc at 0.9112.
The euro, meanwhile, was up 0.81% to $1.0729. Earlier it hit a near one-month high of $1.0737, ahead of the European Central Bank's policy meeting on Thursday.
Expectations call for the ECB to deliver a 50-basis point hike, Christensen said.
"The question is how hawkish will the ECB be. We think they'll signal there will be more rate hikes to come."
Sterling traded at $1.2182, up 1.28% on the day. The Australian dollar jumped 1.35% to $0.666 on track for its biggest one-day percentage jump since Feb. 7.