“Banks margins have gotten thinner, and any energy-related writedowns (despite provisions being built up) may prove to be problematic,” Vecchio said.
[related_stories]If the low oil environment persists and causes a tide of defaults in the energy sector, Vecchio argued that the Federal Reserve would not idly sit back but would probably hold off plans on interest rate normalization.
Markets may already be factoring in the potential risks, which could mean that the Fed will keep rates lower for longer and even reverse tightening if the situation deteriorates.
Consequently, the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), which tracks the price movement of the U.S. dollar against a basket of developed market currencies, may not find much support from the central bank. Year-to-date, UUP has already fallen off 4.3%.