FOREX-Dollar on the defensive as banking fears ebb; yen drops

By Kevin Buckland

TOKYO, March 29 (Reuters) - The safe-haven U.S. dollar remained on the back foot on Wednesday following two days of losses as global financial markets regained a measure of stability on hopes a full-blown banking crisis can be averted.

The dollar index, which tracks the currency against six major peers, was flat in early Asian trading, following drops of about 0.3% in each of the past two sessions. The weakness comes despite a rise in U.S. Treasury yields, which is also the result of ebbing demand for the safest assets.

The yen remained volatile in the run-up to the end of the Japanese fiscal year on Friday. The dollar jumped 0.51% to 131.59 yen, erasing all of the previous day's 0.5% decline, when it uncharacteristically moved in the opposite direction with long-term U.S. Treasury yields.

The 10-year benchmark U.S. yield pushed 1 basis point higher to a fresh one-week peak at 3.579% in Tokyo trading.

Elsewhere, the Australian dollar slipped 0.18% to $0.66965 after a reading of Australian consumer inflation slowed to an eight-month low, adding to the case for a pause next week in the Reserve Bank's rate hiking campaign.

The U.S. currency has lost ground as investors took solace in First Citizens BancShares' agreement to buy all of failed lender Silicon Valley Bank's deposits and loans, as well as overnight comments by Michael Barr, the Federal Reserve's vice chairman for supervision, that SVB's problems were due to "terrible" risk management, suggesting it could be an isolated case.

Still, traders remain very sensitive to signs of any further cracks in the banking system.

"Issues in U.S. banks will remain the dominant influence on the USD in the near term," Joseph Capurso, a strategist at Commonwealth Bank of Australia, wrote in a client note, pointing to the importance of weekly data on money market flows due later in the day, which "will likely highlight the shift of deposits out of small U.S. banks into large banks."

"Another large increase in inflows to money market funds is therefore a downside risk to the USD over the next twenty four hours," Capurso said.

The euro was flat at $1.0845 and sterling slipped 0.06% to $1.2334.

Bitcoin edged up to around $27,400, finding its feet following the problems at the world's biggest cryptocurrency exchange, Binance, which has been sued by the U.S. Commodity Futures Trading Commission (CFTC).

The token had dipped as low as $26,541 on Monday, after its retreat from a nine-month high of $29,380 last week.

(Reporting by Kevin Buckland Editing by Shri Navaratnam)