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 By contrast, over the last two previous trading days, the dollar
lost 4.0 percent against the yen, while dropping to a seven-month
low versus the euro on Monday, as world stock markets slumped and
emerging market currencies plummeted.
The dollar's weakness may continue in the short term, but analysts
expect its longer term rally to continue eventually.
The greenback is still seen as a refuge for those with the closest
links to China such as companies and investors operating in
Australian, Canadian, and New Zealand dollars as well as a slew of
emerging market currencies.
In the short term, two factors may be pressuring the dollar against
the euro and yen.
First, an accelerating economic slowdown in China and the resulting
volatility in global markets have lowered expectations for a Federal
Reserve interest rate rise in September, undermining the
attractiveness of U.S. dollar assets.
Second, the slump in world stock markets appears to be spooking
traders into unwinding "carry trades" financed largely in
low-yielding euros and yen.
"Global risk is elevated right now and so the Federal Reserve would
be cautious in hiking interest rates," said Stephen Jen, a partner
at global macro hedge fund SLJ Partners in London. "That support for
the dollar is not there at the moment."
DOLLAR HIT BY WANING EXPECTATIONS FOR FED RATE RISE
In the past year, the U.S. dollar index <.DXY> gained about 12
percent, as investors priced in a rise in short term interest rates
by the Fed.
But China's economic slowdown fanned fears of a global slowdown,
lowering demand for commodities. A key commodity price index hit a
12 year low <.TRJCRB> this week and emerging market stocks and
currencies also slumped.
U.S. and European companies which earn revenues in China have also
seen their stock prices fall, contributing to the slump in major
world stock markets. The benchmark U.S. S&P 500 index has lost more
than 12 percent since a May high.
The potential impact of a China slowdown and the resulting global
market volatility has cast doubt on the likelihood of a Federal
Reserve interest rate rise in September.
Barclays Bank for example this week changed their forecast on the
timing of a Fed rate increase to March 2016 from their earlier call
of September, saying that the Fed is "unlikely to begin a hiking
cycle in this environment for fear that such a move may further
destabilize markets."
Should market conditions stabilize and prove transitory, Fed
policy-makers could the end its near zero interest rate policy at
their December meeting, they said.
UNWINDING OF CARRY TRADES ALSO UNDERMINES USD
The U.S. dollar was also hit in the past few days by traders closing
out carry trades in yen and euro in order to protect themselves
against further market volatility.
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The dollar's slump against the yen was not a surprise since Japan's
lower interest rates mean the yen has traditionally been used to
fund carry trade investments in higher-yielding assets. In times of
financial stress, investors unwind those bets by selling the risky
assets and buying back the funding currency.
The fall against the euro is more unusual, as the euro zone debt
crisis in the past few years made the euro an unattractive candidate
for a carry trade until the European Central Bank's asset purchase
program lowered euro zone interest rates and eased investor fears
about European economic growth.
The options market, in the near-term, sees more U.S. dollar
weakness. The "skew", a measure of what people are paying for bets
on a currency rising or falling, shows expectations for more
weakness in the dollar against the euro than at any time in the last
year, while the bias for dollar's weakness against the yen is
gradually rising.
"It looks too early to argue that the current financial storm has
blown itself out," said Chris Turner, global head of strategy at ING
in London.
"The uncertainty about the end-point for this Chinese yuan
devaluation remains."
LONGER TERM OUTLOOK FOR U.S. DOLLAR GOOD
Despite the dollar's recent weakness against the euro and the
yen, it remains a haven for investors and companies deriving
revenues from China by selling commodities from Canada, Australia,
as well as for emerging market countries whose currencies have
fallen sharply recently.
Given that U.S. economy continues to grow steadily, making a Fed
interest rate likely in the not too distant future, the dollar is
likely to resume its uptrend of the past year, analysts said.
"The euro is no safe haven," said SLJ Partners' Jen. "I expect
euro/dollar to top out when the world realizes that European
companies are very exposed to emerging markets, more than the United
States is."
(Reporting by Gertrude Chavez-Dreyfuss in New York and Anirban Nag
in London; editing by David Gaffen and Clive McKeef)
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