Dollar bulls are having a reality-check moment as the Federal Reserve keeps traders guessing about when it will raise interest rates.
Currencies of economies with the lowest borrowing costs, including the euro and the yen, rallied against the dollar as bets waned that the Fed will increase its benchmark rate in September.
That pushed the greenback to its biggest weekly loss in two months after minutes of the Fed’s July meeting showed policy makers unconvinced that conditions for a rate increase have been met. “The dollar continues to feel the aftermath of the FOMC minutes,” Sireen Harajli, a strategist at Mizuho Bank Ltd. in New York, said by phone.
“The yen and the euro are more sensitive to yield differentials and the fact you’re seeing interest rates in U.S. coming down.”
The Bloomberg Dollar Spot Index, which tracks the currency versus 10 major peers, dropped 0.4 percent to 1,199.83 at 5 p.m. in New York, a third day of losses. The euro climbed 1.3 percent to a two-month high of $1.1386, gaining 2.5 percent on the week.
The yen advanced 1.1 percent to 122.04 for a 1.8 percent weekly gain. U.S stocks tumbled as Treasuries posted their biggest weekly gain since March.
Funding Currency
A rout in emerging markets amid the latest plunge in oil prices has prompted investors to unwind carry trades, supporting low-yielding currencies.
“Because of how low interest rates are now in Europe, the euro has become a funding currency for carry trades,” Azad Zangana, a senior European economist at Schroders Plc, said in an interview on Bloomberg Television’s “On The Move” with Mark Barton.
“As emerging-market currencies are selling off, people are unwinding those carry trades and having to close their short positions in euros.”
In carry trades, investors borrow in a currency with low interest rates to purchase a higher-yielding asset. The deals tend to depress the funding currency.
The probability that futures traders assign to a Fed rate increase next month slid to 34 percent, from 50 percent on Wednesday, based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.
“The market is caught the wrong way -- six weeks ago the market was convinced we’ll hit parity in the euro and the Fed’s going to raise rates in September,” Douglas Borthwick, head of foreign exchange at New York brokerage Chapdelaine & Co., said by phone.
bloomberg.com
Currencies of economies with the lowest borrowing costs, including the euro and the yen, rallied against the dollar as bets waned that the Fed will increase its benchmark rate in September.
That pushed the greenback to its biggest weekly loss in two months after minutes of the Fed’s July meeting showed policy makers unconvinced that conditions for a rate increase have been met. “The dollar continues to feel the aftermath of the FOMC minutes,” Sireen Harajli, a strategist at Mizuho Bank Ltd. in New York, said by phone.
“The yen and the euro are more sensitive to yield differentials and the fact you’re seeing interest rates in U.S. coming down.”
The Bloomberg Dollar Spot Index, which tracks the currency versus 10 major peers, dropped 0.4 percent to 1,199.83 at 5 p.m. in New York, a third day of losses. The euro climbed 1.3 percent to a two-month high of $1.1386, gaining 2.5 percent on the week.
The yen advanced 1.1 percent to 122.04 for a 1.8 percent weekly gain. U.S stocks tumbled as Treasuries posted their biggest weekly gain since March.
Funding Currency
A rout in emerging markets amid the latest plunge in oil prices has prompted investors to unwind carry trades, supporting low-yielding currencies.
“Because of how low interest rates are now in Europe, the euro has become a funding currency for carry trades,” Azad Zangana, a senior European economist at Schroders Plc, said in an interview on Bloomberg Television’s “On The Move” with Mark Barton.
“As emerging-market currencies are selling off, people are unwinding those carry trades and having to close their short positions in euros.”
In carry trades, investors borrow in a currency with low interest rates to purchase a higher-yielding asset. The deals tend to depress the funding currency.
The probability that futures traders assign to a Fed rate increase next month slid to 34 percent, from 50 percent on Wednesday, based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.
“The market is caught the wrong way -- six weeks ago the market was convinced we’ll hit parity in the euro and the Fed’s going to raise rates in September,” Douglas Borthwick, head of foreign exchange at New York brokerage Chapdelaine & Co., said by phone.
bloomberg.com
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