The dollar fell on Monday as investors responded to UBS’ acquisition of competitor Credit Suisse. The US dollar index fell 0.501% to 103.270 the day after the merger was announced, its lowest level since February 15. The acquisition of Credit Suisse by UBS, engineered by Swiss authorities, did not improve sentiment because of concerns about the global economy.
While this certainly gives global markets a break as a black swan scenario is ruled out, it comes at a very high cost for some categories of investors, which is ultimately having a negative influence on markets this morning, according to ING Economic FX analysts in a note.
The acquisition price was CHF 0.76 per share, far below CS’s Friday closing price of CHF 1.86, and about CHF 16 billion of CS Additional Tier 1 capital bonds were wiped out.
On concerns of contagion, other lenders’ AT1 bonds are under pressure this morning, causing their shares to fall. In other words, while black swan chances have decreased, financial upheaval has not.
This is one of the reasons why the Federal Reserve and five other central banks announced yesterday a concerted step to supply more liquidity to money markets by boosting the frequency of its USD swap lines operations from weekly to daily.
As noted by our rates colleagues here, this appears to be a purely precautionary measure by the Fed, considering that there was no material evidence of outsized demand for dollars last week.
There is presently $470 billion being pulled through swap lines, which is somewhat more than $390 billion a month ago but far less than the $5 trillion witnessed at the height of the pandemic shock.
In a shotgun merger arranged by Swiss authorities, UBS agreed to purchase Credit Suisse for 3 billion Swiss francs ($3.23 billion) and assume up to $5.4 billion in losses on Sunday.
Meanwhile, growth assets such as bitcoin experienced a rally. On Monday, the world’s largest cryptocurrency reached a nine-month high, rising 4.62% to $28,065.00. Concerns about regional US banks are also impacting on the currency, despite many big banks putting $30 billion in First Republic Bank last week.
FRC, the U.S. lender drawing the most unease from investors. First Republic shares tumbled as much as 50% on Monday and were last down about 39%. Under the UBS-Credit Suisse deal, holders of $17 billion of Credit Suisse Additional Tier-1 (AT1) bonds will be wiped out.
That angered some of the holders of the debt, who thought they would be better protected than shareholders and unnerved investors in other banks’ AT1 bonds.
The euro was last up 0.54% against the dollar at $1.0724, while the British pound was last trading at $1.2281, up 0.87% on the day. The dollar rose 0.24% against the Swiss franc at 0.928.
