U.S. Dollar Index Weakening Second Trading Session on Banking Woes, Approaching Debt Limit

The dollar fell during European trade on Friday as traders worried that continued turmoil in the U.S. banking system, along with the rapidly approaching debt ceiling increase day, could lead to an earlier-than-expected rate cut by the Federal Reserve despite its recent hawkish rhetoric. The U.S. Federal Reserve raised interest rates on Wednesday but said it would be the culmination of its aggressive year-long tightening cycle, removing the phrase “anticipating” further rate hikes from its accompanying statement.

Stressing the importance of upcoming data to its future decisions, the Fed will take a close look at the official jobs report due later in the meeting.

Yields on some short-dated Treasuries surged – the 2-month bill rose more than 5%, and it has risen for six straight weeks. BlackRock said it bought U.S. Treasuries in anticipation of a slowing economy and a protracted debt-ceiling battle.

Also, U.S. Credit default swaps (CDS) are seeing its strong demand unabated. Traders most commonly use 6-month CDS, which are trading around 241 basis points (bps), double where they stood 14 days ago.

As a result, by 12:45 p.m. CET, the U.S. Dollar index Spot (DXY) was down 0.2% at 101.23 after falling more than 0.6% in the previous session.