US dollar slides amid banking turmoil

The US dollar index, which measures the greenback against six other major currencies, plunged to near one-month lows on Monday, following a Goldman Sachs forecast that Washington will likely halt rate hikes. According to trading data, the index slid 0.6% to 103.9 by 09:00 GMT.

Goldman’s previous forecast predicted a 25-basis-point hike at the next Fed meeting in March. The change in expectations came after US regulators on Sunday announced a new emergency program aimed at protecting bank clients, following the failures of Silicon Valley Bank and Signature Bank last week.

According to a joint statement from US Treasury, Federal Reserve and the Federal Deposit Insurance Corporation (FDIC), they will make a “systemic risk exception” to allow both insured and uninsured depositors of the failed banks to regain full access to their money. The Fed also separately announced it would make additional funding available for banks in cases of emergency, through a new Bank Term Funding Program.

The measures led investors to predict the Fed may be too busy sorting through the fallout of the banks’ failures to raise interest rates in the near term.

There is a historic correlation between higher interest rates and failures of overleveraged financial institutions. Overleveraging occurs when a business has borrowed too much money and is unable to pay interest payments, principal repayments, or maintain payments for operating expenses due to its debt burden. However, analysts say US inflation data release on Tuesday may also affect the Fed’s rate hike plans.

The Fed hiked the key rate on more than one occasion in recent months in a bid to reign in soaring inflation. The latest 25-basis-point increase was announced on February 1, bringing the rate to a target range of 4.5%-4.75%. Prior to last week, analysts expected at least three more rate hikes this year to bring the indicator to a peak of 5.25%-5.5%.

For more stories on economy & finance visit RT's business section