Dollar plunges to 7-month low versus Euro, Yen amid global rout

NEW YORK – The dollar slumped to a seven-month low against the euro and the yen as most traders concluded the Federal Reserve will refrain from raising interest rates next month amid a global stock-market rout.

The greenback fell to the lowest since January as declining commodity and share prices deepened a plunge in emerging-market currencies that started after China’s shock devaluation of the yuan on Aug. 11.

“Markets are very nervous about the growth outlook for China and the possible impacts on the dollar,” Georgette Boele, a currency strategist at ABN Amro Bank NV, said by phone from Amsterdam.

The dollar fell 2.4 percent to $1.1663 per euro at 9:23 a.m. in New York after falling as low as 1.1714, the weakest since Jan. 15. It dropped 3.8 percent to 117.44 yen after reaching 116.18, the lowest since Jan 16.

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China’s Shanghai Stock Exchange Composite Index plunged 8.5 percent Monday.

“Everyone is right now only concerned about what impact China will have on the U.S.,” said Esther Reichelt, a currency strategist at Commerzbank AG in Frankfurt. “On the dollar side, it’s mainly the concern that the Fed might postpone its rate- hiking cycle.”

‘Selling interest’

Traders are pricing in a 22 percent probability that the Fed raises rates at the September meeting, down from about 50 percent on Aug 19. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase. The probability of a December increase fell to about 46 percent from 73 percent a week ago.

The euro has strengthened about 4.9 percent since July, while Germany’s DAX Index has tumbled 14 percent, heading for its worst monthly drop in four years.

The Swiss franc, euro and yen were the best performers among 10 developed-nation peers in the past week, according to Bloomberg Correlation-Weighted Currency Indexes.

These three are currently optimal funding currencies because of their nations’ low interest rates, Commerzbank’s Reichelt said.

“The characteristic of a funding currency means that you benefit from safe-haven flows in high-risk times, when your money is flowing back to where it was funded from,” she said.

Global equities

Equities worldwide have lost more than $5 trillion in value since China devalued its yuan. Russia’s ruble led a selloff in emerging markets, dropping to an almost seven-month low. South Africa’s rand tumbled to a record. Australia’s Aussie reached a six-year low.

“The rising dollar against EM currencies reduces the chance of the Fed reaching its 2 percent inflation target,” Morgan Stanley strategists led by head of global currency strategy Hans Redeker in London wrote in a note to clients. “In light of global-growth concerns, falling global trade and Asia’s monetary and fiscal response remaining underwhelming, we think that risky markets will find it hard to recover currently.”

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