Foreign exchange trading alert: European banking industry concerns linger, wary of the continued decline of the euro and the pound

The strengthening euro and sterling fell sharply against the dollar on Friday as nervousness about banks lingered. European bank stocks tumbled and banking giants Deutsche Bank and UBS plunged amid fears that the worst problems facing the sector since the 2008 financial crisis had yet to be contained.

The dollar index closed up 0.40% at 103.03 on Friday. The euro closed down 0.48% against the dollar at 1.0774 on Friday.

Joseph Trevisani, a senior analyst at FXStreet.com, said: "For many, many years, whenever there was a perceived problem or an actual problem that seemed to be entrenched, people went to buy dollars, and I think that's probably what's happening now."

The Fed's revised Summary of Economic Projections (SEP), the so-called dot plot, shows the median policy rate at the end of 2023 at 5.1 percent, in line with December's forecast. The Fed's median view of the federal funds rate at the end of 2024 is 4.3 percent, compared with 4.1 percent previously. The Fed's median view of the federal funds rate at the end of 2025 is 3.1 percent, compared with 3.1 percent previously. The median Fed view of the long-term federal funds rate is 2.5 percent, compared with 2.5 percent previously.

The Fed's forecast implies another 25 basis points of interest rate hikes this year and a 75 basis point cut in 2024. The Fed downgraded the US economic growth rate this year and next: the median GDP growth forecast for the end of 2023 to 2025 is 0.4%, 1.2%, and 1.9%, respectively (0.5%, 1.6%, and 1.8% in December); the median unemployment forecast for the end of 2023 to 2025 is 4.5%, 4.6%, and 4.6%, respectively (4.6%, 4.6%, and 4.5% in December); and the median core PCE inflation forecast for the end of 2023 to 2025 is 3.6%, 2.6%, and 2.1%, respectively (3.5%, 2.5%, and 2.1% in December).

Risk aversion also sent the pound down more than 0.5% to 1.2189 against the dollar at one point, despite data showing the UK economy will grow in Quarter 1 and confidence is strengthening. Sterling hit a seven-week high of 1.2341 in volatile trading on Thursday after the Bank of England raised interest rates by 25 basis points to 4.25%, but said an unexpected pick-up in inflation could quickly fade, stoking speculation that it would end its rate hikes.

Bank shares were hit this month after the sudden collapse of two US regional lenders and the emergency sale of troubled Swiss bank Credit Suisse to rival UBS.

Christopher Wong, currency strategist at OCBC, said:foreign exchange marketIt seemed to suggest a wave of risk aversion, with safe haven instruments, gold, and the yen performing well and most other currencies weakening.

However, the dollar closed down just 0.05% against the yen on Friday at 130.71.

The Federal Reserve raised interest rates by 25 basis points as expected on Wednesday, but also took a cautious stance on the outlook due to the turmoil in the banking sector, even as Federal Reserve Chairperson Jerome Powell left the door open to further rate hikes if necessary.

U.S. Treasury Secretary Janet Yellen on Thursday reiterated her readiness to take further action to ensure the safety of Americans' bank deposits in an effort to ease investor jitters.

Mr. Trevisani said the market would be watching the US PCE price index for February, due on March 31, to see how it affected the Fed's next interest rate decisions. "If you get a number that is the same or weaker than expected, I think that gives the Fed a reason to pull back, which they are doing anyway," he said.

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