The dollar index, which measures the greenback against a basket of major currencies, fell 0.7 percent to the lowest level since February 2016. The euro rose 1.2 percent to $1.1709. In comparison, the sterling strengthened by 1 percent to $1.3122. It reached its strongest in six weeks against the dollar amid rising optimism over Brexit talks between Britain and EU leaders and solid UK economic data releases on Wednesday. Meanwhile, Switzerland’s central bank surprised markets by hiking benchmark rates for a second time despite relatively low inflation expectations across Europe due to an expected slowdown in global growth this year, lifting the target range for three-month Libor by 25 basis points from minus 0.75 percent to minus 0.5 percent.
The divergence between U.S. and European monetary policy has also spurred investors into the euro. The currency has gained 1.2% against the dollar since mid-May as expectations for an interest rate hike in Europe have risen. This is especially noteworthy given that, as recently as April, markets were pricing in 40 basis points cut from ECB President Mario Draghi’s zero percent benchmark rate by year-end, despite his insistence that all options remain on the table for future policy decisions. Nevertheless, recent economic data and increasing signs of price stability have convinced investors to prepare for higher rates sooner than expected.
Daingerfield said that the dollar is already pricing in some of this change, but he believes further downside could be ahead. He pointed out that other central banks worldwide have also become more dovish, which could put additional pressure on the dollar. “The global economy is slowing, and so are global interest rates,” Daingerfield noted. “That points to a weaker US dollar over time as real yields fall.”
The SNB’s decision came amid a turbulent period in financial markets, with the euro falling to its lowest level against the dollar since April on Friday. The European Central Bank said last week it would not raise interest rates until at least early 2020 and has maintained that stance despite signs of slowing global growth. The franc largely shrugged off these concerns as investors have sought safety from continued market volatility. As a result, Switzerland’s currency has remained relatively strong against both the euro and the dollar this year.
The strengthening of the franc and Norwegian crown and the weakening of the dollar/yen reflects a global shift in investor sentiment. Investors use higher yields and increased global liquidity to move their money into more attractive currencies. The rise in inflation is also important, making it increasingly likely that central banks will have to raise interest rates to maintain price stability. These developments should continue to drive currency exchange rate volatility in both directions over the coming months.
Moreover, banks are facing another threat. In the wake of Silicon Valley Bank’s collapse, some investors have questioned the risk of investing in banks whose primary business has shifted from traditional banking to technology-based services such as digital trading currencies and providing venture capital for start-ups. Investors are concerned that these activities could be subject to market volatility or technological disruption that would undermine the value of their investments. Despite this uncertainty, large tech companies have continued to pour billions into fintech ventures over the past year, signaling a continued commitment by these organizations to push further into financial services.