Dollar drops, global growth concerns spark Fed rate hike rethink

[October 13, 2014]  By Anirban Nag

LONDON (Reuters) - The dollar fell on Monday, dropping to a one-month low against the yen, as investors turned cautious about the global economy and more uncertain about the timing of the Federal Reserve's first interest rate hike.

German Bunds moved higher, accentuating flows toward safer currencies like the yen and the Swiss franc after rating agency S&P on Friday downgraded Finland and cut its outlook on France.

With market holidays in Tokyo and for U.S. bonds sapping liquidity, the dollar dipped after Federal Reserve officials warned at the weekend that if the global recovery stumbled, it could delay an increase in U.S. interest rates.

The dollar was down 0.3 percent to 107.38 yen <JPY=>, after falling as low as 107.06 yen, its weakest level in about a month and well off a six-year high of 110.09 yen on Oct. 1.

"We look for further yen upside against the dollar in coming weeks, as U.S. (interest) rates are likely to adjust near-term lower," said Petr Krpata, currency strategist at ING. "For dollar/yen, 107 yen could be tested again today."

The euro rose 0.4 percent against the dollar and was slightly higher against the yen at 136.15 yen, having dropped to 135.56 yen, its lowest since last November.

European Central Bank council member Ewald Nowotny said the euro was very likely to keep weakening against major currencies, but there very little impact from his comments.

"Even if the ECB wanted to weaken the euro for a good reason, this leaves the question: how does it obtain that?", said Ulrich Leuschtmann, currency strategist at Commerzbank.

"QE (quantitative easing) would be the safest bet. As the ECB has been fuelling speculation about such a program until recently there is a risk that anything less than QE is more likely to support the euro. And Nowotny dampened QE expectations."

JITTERY MARKET

The dollar has struggled to gain traction, with investors trimming favorable bets last week after dovish-leaning minutes of the U.S. Federal Reserve's September meeting prompted the market to push back the expected timing of a Fed rate hike.

The dollar index was down 0.5 percent at 85.511, well below the four-year high of 86.746 struck earlier this month. It has a good correlation with U.S. Treasury yields which have eased in the past week.

U.S. Treasuries have also risen due to safe-haven flows amid growing worries about a global slowdown. Reflecting the jittery market mood, Wall Street's fear gauge, the CBOE Volatility Index, touched a near two-year high of 22.06 on Friday.

Big swings in stock markets often spill over to the currency market and make yen-funded or euro-funded carry trades appear risky.

Investors often sell the low-yielding yen in carry trades to fund investment in higher-yielding currencies and assets. The yen gets a boost if worries about global growth leads to a worsening of sentiment and triggers an unwinding of such bets.

Earlier on Monday, the yen scaled a six-month high against the growth-linked, higher-yielding Australian dollar, before easing.

The Aussie recovered both against the dollar and the yen after data showed that both Chinese exports and imports exceeded market expectations in September. The Aussie dollar is sensitive to data out of China, the biggest buyer of Australian commodity exports.

(Additional reporting by Masayuki Kitano, editing by John Stonestreet/Ruth Pitchford)

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