MW: Dollar drops as investors take cover in global stock selloff
The dollar dropped against the euro and the Japanese yen on Monday as investors worried that signs of slowing growth in China will prevent the Federal Reserve from raising interest rates at its next meeting.
The euro EURUSD, +1.4927% bought $1.1492, but briefly rose above $1.15, marking the first time it’s been at that level since February, FactSet data showed. The shared currency late Friday in New York traded at $1.1360.
The dollar USDJPY, -1.86% briefly dipped below ÂĄ120 before returning to ÂĄ120.15. Late Friday, it bought ÂĄ121.96. The yen was up against its major rivals as a selloff in Asian markets prompted investors to seek the perceived safety of the Japanese currency. The euro EURJPY, -0.37% was buying ÂĄ137.93, down from ÂĄ139.00 Friday.
Investors generally regard the Japanese currency as a haven asset that retains its value during periods of geopolitical or financial instability.
Overnight, Chinese shares wiped out all of this year’s gains, fanning fears about the deepening effects of a slowdown in the world’s No. 2 economy. The Shanghai Composite Index SHCOMP, -8.49% dropped 8.5%. In Tokyo, the benchmark Nikkei Stock Average NIK, -4.61% closed down 4.6%
Read: China shares wipe out 2015 gains as stocks tumble 8%
U.S. stock futures pointed to a sharply lower open after Friday’s plunge left the Dow Jones Industrial Average DJIA, -3.12% down 531 points and in a correction.
Fears that the once-vibrant Chinese economy may be slowing down is likely to cloud the timing of the Fed’s decision to raise short-term rates. The dollar has already been under selling pressure, as Fed policy-meeting minutes released this month showed that central-bank officials still haven’t settled on whether to raise rates in September.
Read: Oil tumbles to fresh lows on China market turmoil
The euro buying was attributed to the unwinding of the euro-funded carry trade, prompted by a deepening of a risk-aversion mood, as well as to the unclear outlook for the Fed’s next rate increase. Investors plying the carry trade could be forced to purchase euros if the global growth outlook dims or further economic headlines turn negative.
“The short squeeze in the EUR/USD has been so vicious that it has caught many long-term investors by surprise,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management, in a note.
The WSJ Dollar Index BUXX, -0.62% a measure of the U.S. dollar against a basket of major currencies, fell 0.5% to 87.37. The U.S. dollar index DXY, -1.05% fell 0.7% to 94.11.
