BackDollar poised for biggest decline since 2009 amid global rout
Dollar dropped to a seven-month low against the euro and the yen as plunging stock and commodity prices deepened a fall in emerging-market currencies
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New York: The dollar headed for its biggest plunge in more than six years as concerns the global economy is losing momentum led traders to cut bets the US Federal Reserve will raise interest rates this year.
The dollar dropped to a seven-month low against the euro and the yen as plunging stock and commodity prices deepened a decline in emerging-market currencies that started after China’s shock devaluation of the yuan on 11 August. A gauge of the greenback fell by the most since March 2009 on a closing basis as traders unwound bets that the dollar would gain.
“This is a market meltdown," Mazen Issa, a senior foreign- exchange strategist at Toronto Dominion Bank in New York, said by e-mail. “This is an exaggerated move to exaggerated concerns over the global economy."
The dollar fell 1.9% to $1.1600 per euro at 10.09am in New York, after falling as low as $1.1714, the weakest since January. It plunged 2.9% to 118.47 yen after reaching 116.18, the lowest since 16 January.
The Intercontinental Exchange Inc.’s US Dollar Index, which serves as the benchmark for various futures and options instruments, was poised for its worst day since March 2009.
“It really is a jumpy, panicky market," Matt Weller, an analyst at Gain Capital Holdings Inc.’s Forex.com unit in Grand Rapids, Michigan, said by phone.
“It’s emotionally-driven selling across the board."
China’s Shanghai Composite Index plunged 8.5% on Monday.
“Markets are very nervous about the growth outlook for China and the possible impacts on the dollar," Georgette Boele, a currency strategist at ABN Amro Bank NV, said by phone from Amsterdam.
Traders are pricing in a 22% probability that the Fed raises rates at the September meeting, down from about 48% on 18 August. The calculation is based on the assumption that the effective Fed funds rate will average 0.375% after first increase.
The probability of a December increase fell to about 46% from 73% a week ago.
The euro has strengthened about 5.6% since July, while Germany’s DAX Index has tumbled 16%, heading for its worst monthly drop in four years.
The US currency is dropping amid a global “meltdown", John Hardy, head of foreign-exchange strategy at Saxo Bank AS in Hellerup, Denmark, said by email. It will only bounce when investor risk-aversion eases, he said.
The Swiss franc, euro and yen were the best performers among 10 developed-nation peers in the past week, according to Bloomberg Correlation-Weighted Currency Indexes.
These three are currently optimal funding currencies because of their nations’ low-interest rates, said Esther Reichelt, a currency strategist at Commerzbank AG in Frankfurt.
“The characteristic of a funding currency means that you benefit from safe-haven flows in high-risk times, when your money is flowing back to where it was funded from," she said.
Equities worldwide have lost more than $5 trillion in value since China devalued its yuan.
Russia’s ruble led a sell-off in emerging markets, dropping to an almost seven-month low.
South Africa’s rand tumbled to a record. Australia’s Aussie reached a six-year low.
“The rising dollar against the EM (emerging market) currencies reduces the chance of the Fed reaching its 2% inflation target," Morgan Stanley strategists, led by head of global currency strategy Hans Redeker in London, wrote in a note to clients.“In light of global-growth concerns, falling global trade and Asia’s monetary and fiscal response remaining underwhelming, we think that risky markets will find it hard to recover currently." Bloomberg
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