Dollar drops as more bad China news fuels risk aversion
An employee counts U.S. dollar bank-notes near Vietnamese dong bank-notes at a bank in Hanoi, Vietnam - Reuters/Kham
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LONDON: The dollar hit an almost eight-week low against a basket of major currencies on Friday, after more bad economic data from China added to doubts that the U.S. Federal Reserve will be able to raise interest rates next month.

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.”

 

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