European stocks opened more than 3 percent in the red after their Asian counterparts slumped to three-year lows as a rout in Chinese equities threatened to get out of hand.
Advertisement
Moves to strengthen the Chinese economy could provide some support to the kiwi currency, Weston said. The dollar index now trades above all important daily moving averages which is a bullish sign.
“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.
China’s Shanghai Composite Index plunged 8.5% on Monday.
Japanese Finance Minister Taro Aso on Tuesday warned market players against pushing up the yen too much further, saying that its spike against the dollar overnight was “rough” and undesirable for the economy.
Expectations for a Fed rate hike in September have dwindled, as analysts have begun to pencil in a lift-off later in the year or even in 2016. The chance of a December increase fell to 47 percent from 61 percent. The dollar has come under pressure as mounting uncertainty over the global growth outlook and the subdued U.S. inflation outlook has prompted investors to push back expectations for an initial rate hike by the Federal Reserve.
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. Under the practice, investors borrow from countries with low-interest rates that have introduced quantitative easing, chiefly the euro zone, to invest in emerging markets where interest rates are higher.
“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.
South Africa’s rand tumbled to a record. The People’s Bank of China (PBOC) said it was lowering the one-year benchmark bank lending rate by 25 basis points to 4.6 per cent, effective August 26.
Advertisement
That gave credence to a view that while the dollar was likely to struggle against major and more liquid currencies, it would rise against those in emerging markets. Investors, concerned that weak equity markets and slowing growth in China may weigh on the Fed’s path to normalising monetary conditions, could gain some confidence from Fed officials speaking this week and from an expected upward revision to US second quarter gross domestic product.
