By Herbert Lash and Amanda Cooper
NEW YORK/LONDON, March 17 (Reuters) - The dollar fell on Friday as further declines in the shares of Credit Suisse and First Republic Bank rattled markets fearful of contagion and increased concerns that a recession lies ahead because of the impact of tighter monetary policy.
An early recovery in European stocks ran out of steam as investor sentiment remained fragile after a week of turbulence following the failure of Silicon Valley Bank on March 10.
U.S. banks have sought a record $153 billion in emergency liquidity from the Federal Reserve in recent days, while the $54 billion loan for Credit Suisse CSGN.S and $30 billion lifeline for First Republic FRC.Nfailed to halt their stock declines. Credit Suisse fell 8% in Europe and First Republic tumbled 30%.
The dollar index =USD, a measure of the dollar against six other currencies, slid 0.604% as traders waited for the Fed's two-day policy meeting that is expected to end with a one-quarter percentage point hike in interest rates on March 22.
Contracts for fed funds futures show a 61.3% probability that the Fed will raise rates by 25 basis points, according to CME's FedWatch Tool. Futures also show the Fed will have cut rates by July in a sign recession fears are mounting as the U.S. central bank tightens monetary policy to fight high inflation.
Whether the banking turmoil of the past week leads to an immediate recession is hard to say, said Mazen Issa, senior FX strategist at TD Securities in New York.
"It probably increases the probability that you do have a recession and perhaps it increases the probability that you may have a hard-landing scenario, a more severe recession dynamic," he said.
"Once you have one regional bank go down, households question whether or not the regional banks are in trouble, that's a natural human emotion to feel," he said.
Banking troubles revived memories of the 2008 financial crisis, when dozens of institutions failed or were bailed out with billions of dollars of government and central bank money.
Three smaller U.S. lenders, including First Republic, have had regulators and other banks step in to prop them up, while in Europe, Credit Suisse became the first major global bank since the financial crisis to get an emergency lifeline.
"There is a wait and see approach as to what will happen with the U.S. economy," said Ed Moya, senior market analyst at OANDA in New York. "Now we're not debating a‘soft landing, no landing.’ We're debating is it a mild or severe recession?"
The euro EUR= rose 0.66% to $1.0675.
The rescue of First Republic on Thursday initially boosted risk appetite on Friday as concerns about global banks eased, making way for surges in the Australian and New Zealand dollars.
Sterling GBP= last traded at $1.2192, up 0.70%, while the dollar CHF= fell 0.39% against the Swiss franc. Earlier this week, the franc plunged the most against the dollar in one day since 2015, when the Swiss central bank loosened its currency peg.
The Japanese yen JPY=, which tends to benefit in times of extreme market volatility or stress, strengthened 1.48% versus the greenback to 131.77 per dollar.
Japan's Ministry of Finance, Financial Services Agency and Bank of Japan officials met on Friday evening to discuss financial markets.
Masato Kanda, vice finance minister for international affairs, told reporters after the trilateral meeting that the government, the central bank and the banking watchdog would coordinate to ensure the stability of the financial system.
The Australian dollar AUD=, which often outperforms when investors are feeling optimistic, rose 0.81% to $0.671.
Currency bid prices at 3:09 p.m. (1909 GMT)
U.S. Close Previous Session
YTD Pct Change
World FX rateshttps://tmsnrt.rs/2RBWI5E
SVB Financial seeks bankruptcy protection as banking turmoil persists
ECB watchdog sees no Europe contagion after US, Swiss bank rescues
First Republic shares fall despite unprecedented Wall Street rescue deal
GRAPHIC-Banking worries send US markets on dizzying ride
Major US banks inject $30 bln to rescue First Republic Bank
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ANALYSIS-Investors stick to bets on early end to ECB hikes as uncertainty grows
GRAPHIC-Markets tumble then recover amid bank crisishttps://tmsnrt.rs/3mNboDp
GRAPHIC-Americans opt to keep their money with the bankshttps://tmsnrt.rs/3LrAFxq
GRAPHIC-Majority of Americans oppose a bank bailouthttps://tmsnrt.rs/408dP1Y
Global currencies vs. dollar IMGhttps://reut.rs/2xKnuUn
Odds point to 25 bps Fed rate hike next weekhttps://tmsnrt.rs/3Tn335y
(Additional reporting by Rae Wee in Singapore; Editing by Nick Zieminski and Mark Potter)
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