bloomberg.com – Eshe Nelson
The dollar climbed for the first time in five days against the yen as stock markets rallied following Monday’s $2.7 trillion global equity wipeout and China cut interest rates.
The U.S. currency’s biggest gains came against the Swiss franc and euro, as well as the yen — all currencies that investors consider to be havens in times of market turmoil. The yen weakened after a Japan Ministry of Finance official said its rally to a seven-month high as China’s economy slows had been “abrupt.”
“The better tone in markets, and a rebound from yesterday’s collapse, is helping lift dollar-yen,” said Keng Goh, a foreign-exchange strategist at Royal Bank of Canada in London. If equity markets stay calm, expectations for the Federal Reserve to raise interest rates will build again, further supporting the U.S. currency, he said.
The dollar jumped 1.5 percent to 120.13 yen as of 7:10 a.m. in New York, after slumping to 116.18 on Monday, the weakest since Jan. 16.
It climbed 1 percent to $1.1498 per euro. Europe’s single currency gained 5.4 percent in the previous four days, the most since March 2009.
Futures signaled the Standard & Poor’s 500 Index of U.S. equities will rebound after entering a correction, while the Stoxx Europe 600 Index advanced 4.3 percent. The wave of selling continued in Chinese shares, capping the biggest four-day drop in almost 19 years.
China’s central bank cut its benchmark lending rate for the fifth time since November and lowered the amount of cash banks must set aside, stepping up efforts to cushion the stock-market slide and a deepening economic slowdown.
“The source of the current crisis — uncertainty regarding Chinese policy — is still very much there,” said Chris Turner, head of currency strategy at ING Groep NV in London. “Defensive positions are still the way to go. Exposure to emerging markets will stay under pressure and will struggle to recoup much of the recent losses.”
Currencies in developing nations and those reliant on exporting commodities to China also rallied.
Australia’s dollar rose the most in two weeks after sliding Monday to a six-year low. South Africa’s rand and Mexico’s peso rebounded from records, while Russia’s ruble surged 1.7 percent.
Fed Bank of Atlanta President Dennis Lockhart said he still expects the first U.S. interest-rate increase in nearly a decade will happen this year, while cautioning that a stronger dollar, weaker Chinese yuan and falling oil prices complicate the outlook. He didn’t cite a particular month.
Traders have cut the odds of the Fed raising rates at its September meeting to 28 percent, from 48 percent on Aug. 18. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.
When asked by reporters in Tokyo Tuesday about the yen’s surge overnight, the Japan Finance Ministry official said, “I think it was abrupt.”
Twenty-one of 37 economists in a Bloomberg survey conducted July 27 to Aug. 3 forecast the Bank of Japan will eventually add to its record stimulus, with 12 predicting action in October.
“This morning’s rally in dollar-yen reflects a persistent view that a weaker yen is needed to support the Japanese economy — as well as the growing likelihood that the BOJ will ease again in October,” said Callum Henderson, global head of foreign-exchange research at Standard Chartered Plc in Singapore.
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