RTRS: Dollar trims gains as Chinese, European stocks sell off
The dollar cut gains against the safe-haven yen and euro on Wednesday, as Chinese and European stock markets lost ground despite China's easing measures, with most investors fretting over the outlook for the global economy.
Analysts said the recent sell off in global markets had contributed to a sharp rise in volatility and it was still unclear whether the U.S. Federal Reserve would opt for tightening monetary policy or not. Besides, the outlook for the Chinese economy was growing more uncertain than ever.
The euro briefly turned higher on the day, rising to $1.1515 EUR= in London trade, while the dollar was trading at 119.35 yen JPY=, having traded at 119.83 yen in early European deals. 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 financial markets come under stress, these trades are unwound.
The pan-European FTSEurofirst 300 index .FTEU3, fell 2.6 percent while the euro zone's blue-chip Euro STOXX 50 index fell by a similar amount. The Shanghai composite index .SSEC fell to a 8-month low, dropping for a fifth straight trading session.
"The Chinese measures haven't really restored confidence. The market turmoil is not over. And under such risk averse condition, 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 drove investors to buy back the yen and euro. With the longer-term sustainability of China's latest supporting steps still in doubt, these currencies are expected to advance.
"We have seen the yen, and particularly euro, gain on flight from risk which results in unwinding of carry trades. The euro has developed a reverse correlation with equities, particularly after the rout in China. Given its ample liquidity, it will likely continue to gain in times of 'risk off,'" said Junichi Ishikawa, market analyst at IG Securities in Tokyo.
