Why Wasn't the USD a Haven in the SVB Bank Run?

The massive bearish action in markets since the Silicon Valley Bank collapse has seen the US dollar tumble alongside risky assets like stocks. Does this mean peak dollar and peak rate expectations have passed?

While typically the USD and risk markets (equities, commodities, etc) trade inversely, the last few days have seen equities prices plunging across the board while USD has been dropping too. Given this dynamic, traders are questioning what is driving these moves and whether this price action is likely to continue or we’re going to see a reversion to typical trading patterns. 

SVB Collapse & Market Turmoil 

The first thing to examine is the factors that are driving stocks and the USD lower. For stocks, the main factor has been the recent collapse of Silicon Valley Bank, the first large US bank to collapse since the GFC. Alongside this, Signature Bank has been shuttered by US regulators in a pre-emptive move to protect against a similar collapse. 


SVB chart at point of collapse – almost 90% down from all-time highs 

SVB Contagion Fears 

SVB announced an almost $2 billion loss linked to the sale of a bond portfolio made up of US Treasury positions. With a subsequent share sale to raise equity failing, the bank collapsed on Friday. The news immediately raised concerns regarding the broader health of the US banking system,, on the back of the Fed’s recent tightening campaign, and the size of the unrealized losses likely sitting on banks’ balance sheets. 

Banking Stocks Plunging 

Shares in regional banks were seen crumbling as contagion fears and speculation of the next bank to collapse saw investors abandoning their stakes and speculators piling in short. As contagion fears spread around the globe, indices on all continents tanked. Despite the Fed stepping in to guarantee SVB’s client deposits (preventing a GFC-level crisis) and announcing a new bank funding program, fears of further failures to come are keeping investor sentiment skewed to the downside. 

Fed View Turns Less Hawkish 

Typically, in these conditions, USD would rally on safe-haven demand. However, USD has also come under pressure in recent days as the ongoing market turmoil has seen traders scaling back their Fed rate-hike projections for March. The prevailing view is that with banking sector liquidity concerns a major issue right now, the Fed will not want to exacerbate these concerns by tightening financial conditions further. In light of this, we’ve seen pricing for the upcoming March FOMC shifting back in favour of a smaller 25 bps hike from the 50 bps hike projected at the start of last week. 

US Inflation Drop Points to Smaller Fed Hike 

This week’s US inflation data has further strengthened traders’ convictions for a smaller Fed rate hike. Annualised CPI rose 6% last month, down from 6.4% prior. Marking the 8th consecutive fall in inflation. The data is a strong sign that the disinflationary process is alive and well, despite a small uptick in monthly core inflation to 0.5% from 0.4% prior and a solid labour market. Given the current backdrop, it would have taken a firm upside surprise to derail the view of a reduced Fed rate hike. As a significant indicator of how much the outlook has shifted, Goldman Sachs is now calling for no hike this month at all. 

Bullish Equities Outlook 

In terms of how price action is likely to develop going forward, the risks appeared skewed in favour of a weaker US Dollar and an eventual recovery in equities prices. With the Fed likely to opt for a smaller hike this month and a less-hawkish outlook, equities should be underpinned. However, the extent to which equities are able to recover near-term will depend on whether investor uncertainty passes and if banking stocks in particular find their feet. If any more banks sound the alarm or, worse still, collapse, this will put much greater pressure on global stock prices with USD likely to head lower also as Fed expectations turn more dovish. 

S&P 500 – Weekly Technical Chart

Source: TradingView / FlowBank


The attempted breakout of the bear channel from all-time highs has stalled for now into a test of the 4,185 level. However, with the retest of the broken channel and 3,846 level holding as support, the outlook remains bullish. Longer-term, look for a break of 4,185 to open the way for a move up towards the 4,561 level.