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Dollar eyes fall quarterly as rate hike bets recede

SINGAPORE/TOKYO, March 31 (Reuters) – The dollar headed for a second straight quarterly loss on Friday as investors see US interest rates close to a peak and expect the dollar’s yield advantage to wane.

A modest rebound from a rush for safety in mid-March, when bank jitters hit global markets, appears to be fading and the dollar index is down 1.2% on the quarter, up from a 7.7% decline in the fourth quarter of 2022 to continue.

Movement in Friday’s Asian session was modest as a tense calm settled over traders still eyeing the prospect of further deposit flight at US regional banks.

The euro rose 0.5% on Thursday after stronger-than-expected German inflation figures bolstered expectations that there would be some more rate hikes in the euro-zone.

In Asia, it held steady at $1.0898 as investors await Europe-wide inflation data later in the day. The core personal consumption expenditure (PCE) index, the US Federal Reserve’s preferred measure of inflation, is also due.

The dollar rose 0.2% against the yen to 133.07 yen.

By March, US interest rates markets have dramatically reassessed the outlook and now see about a 40% chance that the Federal Reserve is done raising rates. Fed fund futures have priced in rate cuts by the end of the year.

“The dollar is likely to be range bound until the implications are a bit clearer, but if the reassessment of the US interest rate outlook holds, it will fall quite a bit further,” Societe Generale analysts said in a statement Communication.

“The saga must impact both credit demand and credit supply, and unless economic data recovers very quickly, the end of the Fed’s rate-hiking cycle is certainly much closer now and the dollar remains well above long-term average levels in real terms,” they said in reference to the recent banking turmoil.

The collapse of Silicon Valley Bank three weeks ago sparked broader concerns about bank confidence around the world – forcing Credit Suisse into the arms of rival UBS and sending bank stocks from London to Tokyo.

FX markets were generally more stable than equities and did not reflect the wild volatility seen in bond trading, although the yen – viewed as a safe haven thanks to Japan’s status as the world’s largest creditor – rose 2.5% over the month is.

This week, the yen is down about 1.7% against the dollar.

“This week we have a rebound in risk sentiment because we haven’t had any major bad news about European or US financial institutions,” said Yujiro Goto, chief FX strategist at Nomura Securities in Tokyo.

“How risk sentiment trades next week will be crucial for dollar/yen.”

Another so-called safe haven, the Swiss franc, had a wild month, surging after the collapse of Silicon Valley Bank and then plummeting as the banking crisis hit Switzerland.

It looks like it will end the month up 3% against the dollar.

With central bank meetings in Australia and New Zealand next week, markets have priced in a pause for Australia and reduced the pace to a 25 basis point gain for New Zealand.

On Friday, the New Zealand dollar broke through its 50-day moving average to hit a near two-week high of $0.6296. It’s about 1% lower for the quarter.

The Australian dollar remained steady at $0.6715 and is about to test its 200-day moving average. It’s also about 1.3% lower than in the quarter.

Both currencies found support from expanding Chinese manufacturing activity, although Friday’s data showed the pace was slowing. China’s yuan rose incrementally.

Sterling stayed at $1.2387 on Friday and is targeting a 2.5% quarterly gain as investors anticipate that scorching UK inflation will require more rate hikes to tame it.

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Currency bid prices at 0552 GMT

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Tokyo Forex Market Information by BOJ

Reporting by Tom Westbrook; Edited by Gerry Doyle, Robert Birsel

Our standards: The Thomson Reuters Trust Principles.

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