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With
the latest Chinese numbers showing factory activity shrinking at
its fastest pace in 6-1/2 years in August, investors are
becoming increasingly concerned that the world's second-largest
economy may be slowing sharply and that global growth, as a
consequence, may also be stalling.
Markets had been reckoning the Fed could raise rates as soon as
September, as the U.S. economy continues to grow solidly, but
the latest data from China, along with sliding commodity prices
and unconvincing U.S. inflation data, has seen most investors
take their bets of a September hike off the table.
The euro, which currently is often used as a "funding" currency
borrowed in order to invest in riskier but higher-yielding
emerging market currencies, hit a two-month high of $1.1295 <EUR=>
as a risk-off mood saw investors buy it back. The dollar index
fell to 95.4 <.DXY>, its weakest since June 30.
Although the single currency has held up relatively well over
the past few months as worries over Greece and China have kept
risk appetite subdued, most major banks still expect it to end
the year significantly lower, as ultra-loose monetary policy in
the euro zone diverges with tighter U.S. policy.
"We have a risk-off situation right now," said DZ Bank currency
analyst Sonja Marten in Frankfurt. "But ... it seems to me the
market impact we're seeing is a bit over the top. Even if the
Fed waits a couple of months, they're still going to be miles
ahead of the ECB, so the story still stands."
Data showing the German private sector growing more strongly
than expected in August also gave the euro a small boost, though
further gains were capped as Greek markets opened sharply lower
after the country's prime minister resigned. <ECONDE>
The euro is likely to stay firm against the dollar if global
equities weaken further, said Jesper Bargmann, head of trading
for Nordea Bank in Singapore.
Against the yen, which is also used as a funding currency and is
a more traditional safe haven, the dollar fell to its weakest in
six weeks, at 122.81 yen <JPY=>.
"In an eerie repeat of the 2013 taper tantrum, the latest risk
selloff is mutating into a USD selloff," wrote Credit Agricole
analysts in a research note. "The taper tantrum was Fed-induced
while the latest bout of risk aversion is fueled by concerns
about China. The USD-weakness thus seems to be more of a
collateral damage."
(Additional reporting by Masayuki Kitano in Singapore; Editing
by Alison Williams)
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