Wednesday, 26 August 2015 16:52
LONDON: The dollar rose on Wednesday as some calm returned to currency markets with Wall Street stock futures pointing to a firm start and European shares recouping some of their losses, all of which lessened the need to buy safe-haven currencies like the yen.
China’s central bank ramped up its efforts to shore up sentiment, pumping $ 21.8 billion into the money market, a day after it cut interest rates and relaxed reserve requirements for some large banks.
Still, many investors were cautious with the recent sell off contributing to a sharp rise in volatility. Besides, it was still unclear whether the US Federal Reserve would opt for tightening monetary policy or not.
The Federal Reserve’s William Dudley, an influential policymaker, speaks later in the day and could shed some light on the central bank’s thinking around recent equity market volatility.
US stock index futures were sharply higher , while European stocks cut some of their losses.
The euro was down 0.8 percent at $ 1.1420, with the single currency also hurt by comments from a senior European Central Bank official.
Peter Praet said that the risk of the ECB missing its inflation target has increased due to commodity price falls and weakness in some overseas economies.
The dollar was trading 0.6 percent higher at 119.53 yen , having slumped to a 7-month low of 116.16 on Monday.
Both the euro and the yen have been underpinned after the current market turmoil prompted an unwinding of carry trades. In carry trades, investors sell a low-yielding currency to buy a riskier asset or currency for higher returns.
But when volatility rises and markets come under stress, these trades are unwound.
“The Chinese measures haven’t really restored confidence. The market turmoil is not over. And under such risk averse conditions, the yen and the euro will continue to be supported,” said Alvin Tan, currency strategist at Societe Generale.
“In the short term, the dollar is likely to underperform the euro and the yen. We also expect the Fed to be very cautious about raising rates.” The dollar traded above 125 yen while the euro was below $ 1.10 just two weeks ago, before widespread risk aversion swept financial markets and drove investors to buy back the yen and euro.
Besides, the debate over whether the Federal Reserve will raise interest rates or not has gathered momentum with markets pricing in less than a 30 percent chance of a hike in September, compared to more than 50 percent two weeks ago.
Any dovish comments from Dudley could weigh on the dollar. “Dovish commentary has the potential to put the dollar under selling pressure with dollar/yen likely being the main victim as Japan’s retail accounts have placed record bets on the prospect of rising rate differentials pushing dollar/yen higher.
These hopes may now fade,” Morgan Stanley analysts wrote in a report.
