USD mixed, havens bid on US regional bank concerns – Scotiabank

The US Dollar (USD) is mixed to softer overall and heading for a close on the week overall that may be weak enough to point to a halt in the DXY’s rebound since mid-September, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

USD mixed to lower as risk mood weakens on regional US bank focus

Dovish comments from Fed policymakers helped keep the USD tone defensive yesterday. US yields dipped, pulling the 10Y Treasury yield back under 4% and the 2Y yield back to the lowest since 2022. US yields retreated further as focus shifted to concerns about the US regional bank sector’s credit health and those worries have extended into today’s session as regional banks are poised to unveil earnings. Weak bank stocks pulled US equities lower yesterday and global stocks are down broadly today, driving a risk-off reaction across markets."

"Bonds have caught a haven bid while gold gains stretched to just below $4380. In the FX space, the JPY and CHF are clear outperformers on the session while high beta EM FX (ZAR, KRW and MXN) is underperforming. This is very similar to the FX trends seen around the SVB failure/regional US bank problems in March 2023."

"As we noted yesterday, the USD outlook was already looking somewhat constrained by the recent narrowing in its yield advantage over its core peers and, in the absence of a stronger safety bid, the DXY still looks prone to near-term (at least) losses; we continue to target a drop back to the low/mid-97 range. Markets are fully priced for 1/4-point cuts from the Fed this month and December but Governor Miran continues to argue for a more aggressive rate stance and bank sector stress is adding marginally to expectations of a more aggressive easing through the end of this year."