By Rae Wee

SINGAPORE (Reuters) – The dollar regained some ground on Tuesday but was pinned near a five-week low as traders tiptoed back into riskier assets after UBS’ state-backed takeover of Credit Suisse allayed some fears of a widespread, systemic banking crisis.

Market sentiment remained fragile, however, as investors struggled to determine the scale of the ramifications from a sector hit that began with Silicon Valley Bank’s collapse, putting a cap on risk appetite and giving some support to the safe haven dollar.

Sterling rose 0.02% to $1.2280, while the euro steadied at $1.0722.

The Aussie fell 0.22% to $0.6703.

News of UBS’ planned takeover of rival Credit Suisse on Sunday – a shotgun merger engineered by Swiss authorities – gave way to a small risk-on rally on Monday, as worries over market-shaking turmoil across global banks waned.

“Markets remain nervous, but the rapidity of policymakers’ response to the evolving banking sector risks is heartening,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

In another show of authorities’ determination to stem widespread contagion and to ease market concerns, the Federal Reserve, in coordination with central banks elsewhere, announced on Sunday that it would offer daily currency swaps to ensure banks in Canada, Britain, Japan, Switzerland and the euro zone would have the dollars needed to operate.

“There has been pretty modest demand for U.S. dollars at the Fed swap lines, so that is a positive sign in and of itself,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia (OTC:CMWAY) (CBA).

“But there continues to be some signs of stress in funding markets … so currencies will continue to be pretty cautious,” she added.

The dollar slipped 0.12% to 131.15 against the Japanese yen, while the U.S. dollar index, which measures the greenback against a basket of currencies, fell 0.04% to 103.30.

Lower U.S. rate expectations also added to downward pressure on the dollar ahead of the Fed’s two-day policy meeting commencing later on Tuesday.

According to the CME FedWatch tool, markets are pricing in a 26.2% chance that the Fed will stand pat when it announces its monetary policy decision on Wednesday, with a 73.8% chance of a 25 basis point rate hike.

“Given all the market turbulence and concerns around the global financial system, I think it will be important for Fed Chair (Jerome) Powell to give reassurance to market participants that the U.S. financial system, at least, is very resilient and robust,” CBA’s Kong said.

Elsewhere, the kiwi slid 0.16% to $0.6237. The Reserve Bank of New Zealand said on Tuesday it saw no immediate need to request the reinstatement of a U.S. dollar swap line that expired in 2021.

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