Stanchart Says Dollar Bears Can Survive A Slow-Burn Bank Crisis

Standard Chartered Plc has made the decision to recommend to investors that they should bet on a weaker dollar if they are more concerned about a sluggish US economy than a full-blown banking crisis at the beginning of the year.

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In a note that was published on Wednesday, Steve Englander, global head of the Group-of-10 currency research, warned that the banking problems in recent weeks won't lead to a panic in the markets, which would stimulate greenback demand, according to the dollar smile theory. According to the commissioner, the interest-rate differentials are currently the main focus of the market, since the Fed seems to be switching to a dovish stance based on inflation forecasts.

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Englander said that he believes that the trade for shorting the dollar is safe as long as issues within the banking sector are simmering, but they aren't boiling over." The simmer mode means that a slowing economy and low interest rates are likely to result in dominating financial market spillovers. 

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According to Trade Algo's dollar gauge, the dollar is on track to fall a third time this week after the federal government took action at the last minute to secure depositors' funds, as well as increased emergency liquidity measures, in order to limit the bad consequences of the collapse of some small lenders. As a result, investors opted to bet on the Fed cutting interest rates this year in order to protect the economy from further damage.

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The Fed is facing a greater immediate risk than inflation for the first time in about 18 months. A major risk is the possibility that excessive hawkishness could spark bank stress again. As Englander stated, “inflation risk still exists, but it is likely to move at a relatively slow pace and can likely be addressed by gradual hikes, as necessary.”

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When the US economy is either in a slump or is growing strongly, the dollar smile theory predicts that the dollar will rise during these periods and fall during those times when the economy is growing at a moderate rate.