NEW YORK/LONDON (Reuters) -The dollar fell on Friday as further declines in the shares of Credit Suisse and First Republic Bank (NYSE:) 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 and $30 billion lifeline for First Republic failed to halt their stock declines. Credit Suisse fell 8% in Europe and First Republic tumbled 30%.

The , 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 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 last traded at $1.2192, up 0.70%, while the dollar 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, 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, which often outperforms when investors are feeling optimistic, rose 0.81% to $0.671.

Currency bid prices at 3:09 p.m. (1909 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct Change High Bid Low Bid

Previous

Session

Dollar index 103.7400 104.3900 -0.60% 0.242% +104.4400 +103.6800

Euro/Dollar $1.0677 $1.0611 +0.62% -0.36% +$1.0686 +$1.0611

Dollar/Yen 131.7650 133.7800 -1.49% +0.51% +133.7350 +131.5550

Euro/Yen 140.68 141.91 -0.87% +0.27% +142.2000 +140.1700

Dollar/Swiss 0.9255 0.9293 -0.38% +0.12% +0.9299 +0.9241

Sterling/Dollar $1.2194 $1.2110 +0.69% +0.82% +$1.2200 +$1.2103

Dollar/Canadian 1.3721 1.3722 +0.00% +1.28% +1.3773 +1.3679

Aussie/Dollar $0.6708 $0.6658 +0.79% -1.56% +$0.6724 +$0.6650

Euro/Swiss 0.9883 0.9859 +0.24% -0.12% +0.9911 +0.9841

Euro/Sterling 0.8754 0.8760 -0.07% -1.02% +0.8782 +0.8745

NZ Dollar/Dollar $0.6271 $0.6196 +1.20% -1.24% +$0.6277 +$0.6192

Dollar/Norway 10.6960 10.7700 -0.68% +9.00% +10.7660 +10.6700

Euro/Norway 11.4219 11.4211 +0.01% +8.84% +11.4412 +11.3507

Dollar/Sweden 10.4853 10.5049 +0.29% +0.74% +10.5515 +10.4430

Euro/Sweden 11.1910 11.1582 +0.29% +0.42% +11.2054 +11.1239

The U.S. dollar slipped lower in early European trade Friday and riskier currencies rallied on easing concerns about a global banking crisis.

At 04:25 ET (08:25 GMT), the , which tracks the greenback against a basket of six other currencies, traded 0.4% lower at 103.715.

The foreign exchange market has seen a relief rally after a number of large U.S. banks injected $30 billion in deposits into First Republic Bank (NYSE:), supporting this regional bank which had been caught up in the backwash of the collapse of two other smaller U.S. banks over the past week.

The move followed Credit Suisse’s (SIX:) announcement earlier on Thursday that it would borrow up to $54B from the Swiss National Bank, ensuring the embattled lender had sufficient liquidity to cope with hefty withdrawals in the wake of a number of banking scandals.

rose 0.5% to 1.0659, benefiting from the decision of the to go ahead on Thursday with its previously signaled 50-basis-point rate hike amidst the banking turmoil.

This suggested the ECB policy makers remain confident in the underlying strength of the Eurozone banking sector.

At her regular press conference, President trod a fine line between acting tough on inflation and acknowledging the need for caution amid growing signs of financial stability risks.

The final data for the Eurozone is due later in the session, and is expected to show that inflation grew 0.8% on the month in February, up 8.5% on the year.

rose 0.5% to 1.2166, soared 0.8% to 0.6708, gained 0.8% to 0.6246, while fell 0.3% to 133.32.

Japan’s government is closely coordinating with the Bank of Japan and financial authorities overseas to prevent fallout from the banking difficulties of a number of Western banks, Finance Minister Shunichi Suzuki said on Friday.

U.S. economic data will center around the release of the University of Michigan’s reading for March later in the session, which will provide a clue as to how Americans are coping with the current economic difficulties.

That said, most eyes have now moved on to next week’s Federal Reserve monetary policy , with expectations rising that the U.S. central bank could slow its aggressive rate-hike campaign in a bid to ease the stress on the financial sector.

Markets are now pricing in a nearly 90% chance that the Fed will hike by a smaller 25 basis points next week.

Most Asian currencies rose sharply on Friday amid easing fears of a global banking crisis, while the dollar retreated as markets also bet that the Federal Reserve will soften its hawkish stance to prevent more economic pain.

was among the best performers for the day, rising nearly 0.5% as a positive outlook on the Chinese economy from Goldman Sachs also boosted sentiment. The investment bank expects China’s economy to grow 6% this year, more than government forecasts of 5%.

Economic data released this week showed that certain facets of the economy were recovering from three years of COVID lockdowns. But growth in the manufacturing sector still remained below full capacity.

The rose 0.6% and was set to add 1.4% this week, having benefited greatly from increased safe haven demand. A mild improvement in Japan’s massive also helped sentiment towards the yen, amid easing supply chain issues.

Broader Asian currencies advanced amid increased risk appetite, as fears of an imminent banking collapse were eased by several major U.S. lenders supporting First Republic Bank (NYSE:). This came after Swiss lender Credit Suisse Group AG (SIX:) scored an up to $54 billion credit facility from the Swiss National Bank to fortify liquidity levels.

The support for banks, coupled with government reassurances that the banking sector was stable, helped ease concerns over an imminent collapse in the banking system, following the failure of several U.S. banks over the past week.

The and dollar index futures retreated about 0.3% each amid bets that the Fed will taper its hawkish stance to prevent further pressure on the economy from rising interest rates.

The collapse of several U.S. banks in recent weeks was driven largely by a slump in bond prices, to which lenders such as Silicon Valley Bank were disproportionately exposed.

Markets are now pricing in a nearly 90% chance that the Fed will hike by a smaller 25 basis points next week.

Risk-heavy Southeast Asian currencies advanced on Friday, with the rising 0.6%, while the added 0.5%.

The rose 0.3% after data showed the island state’s key non-oil exports shrank slightly less than expected in February from the last year.

The rose 0.2%, also benefiting from weakness in oil markets, while the surged 0.8% after logging sharp losses over the past week.