Dollar Holds Steady as Safe-Haven Demand Prevails
The dollar index held steady on Wednesday, despite easing below 102.5, as concerns about the banking sector in the US and economic uncertainties in China continued to spur safe-haven demand for the currency.
On Tuesday, Moody’s cut the credit rating of ten small to mid-sized US banks and warned that other large US banks are also on its downgrade watchlist. This news added to concerns about the health of the US banking sector, which has been under pressure in recent months due to rising defaults and declining asset values.
In China, the latest data showed that the country’s imports and exports contracted faster than expected in July, while consumer prices fell for the first time in more than two years, fanning deflation fears. This news further weighed on sentiment toward the Chinese yuan, which fell to its lowest level against the dollar in over a year.
Elsewhere, Italian banks came under pressure after the government imposed a one-off 40% tax on their profits. This news raised concerns about the financial stability of Italy’s banking sector, which is already struggling with high levels of bad debts.
With safe-haven demand continuing to outweigh risk appetite, the dollar is likely to remain firm in the near term. However, investors will be closely watching the upcoming US inflation data for any signs that the Federal Reserve may be closer to raising interest rates. If inflation continues to rise, it could put pressure on the dollar, as it would increase the likelihood of a rate hike from the Fed.
Overall, the dollar is expected to remain range-bound in the near term, with safe-haven demand providing support and risk appetite providing resistance.