Simon White, Bloomberg macro strategist and author,
As the Fed attempts to stabilize the US banking sector, the dollar faces further risk of deterioration in its balance sheet.
After the last week's turmoil, markets are now taking a break. However, there are still problems. Several smaller US banks remain at risk following the devastation of sentiment that followed the collapse of SVB.
According to reports, First Republic, a particularly troubled lender, will get more assistance from the Fed. To help First Bank, the central bank will likely extend its lending programs.
The Fed has two main ways it can ease its balance sheet:
Through expanding it (QE) and lending programs
Credit easing is a way to make it worse.
It all depends on which securities the banking system uses for'making position'.
In the end, in order to avoid any crisis points, the Fed must deal with these securities during times of difficulty.
The Fed's balance sheets are more vulnerable to deterioration if the assets in the banking sector's balance-sheet are of lower quality. The Fed considers the dollar a liability and its value decreases the more it takes on collateral of lower quality.
The chart below shows how the dollar's value has declined over time.
The relationship between the Fed's decline in balance sheet (measured by the percentage high-quality assets) and the dollar's real value, i.e. the dollar's purchasing power, is almost 1:1. Its purchasing power.
The Fed has already increased its balance sheet. Any new lending programs will almost certainly cause a decline in the balance sheet as it accepts collateral of lower quality.
SVB had a lot more USTs than other banks, such as MBS and CUs. JP Morgan estimates that 70% of the market is in the small-bank sector. This sector has a greater exposure to commercial real estate loans. (Note: Some loans that are considered real-estate loans can be business loans secured by commercial real property.
CRE prices are falling fast due to recent banking troubles. However, they also face structural challenges.
Office vacancy rates reached near 20-year highs due to changing worker behavior.
The dollar's FX price is also vulnerable to cyclical fluctuations. While there is little demand for US assets, hedging costs are high and the dollar's FX value is vulnerable. However, reliable indicators like the real yield curve remain flattening.