US Dollar Rallies as Global Stocks Advance While China Cuts Rates

Frankfurt (Aug 25)  The dollar is regaining its footing. The US currency rose for the first time in five days as stock markets rallied following Monday’s $2.7 trillion global equity wipeout and as China cut interest rates.

Some of the dollar’s biggest gains came against the Swiss franc, the euro and the yen -- all currencies that investors consider havens in times of market turmoil. Japan’s currency weakened after a Ministry of Finance official said its rally to a seven-month high Monday had been “abrupt.”

“The dollar is doing better against the yen and the euro because risk appetite has returned,” Greg Anderson, Bank of Montreal’s global head of foreign-exchange strategy, said by phone from New York. “China has showed that they will continue to use policy interventions to put a floor under their equity market, probably a floor under their currency, and that means that we’re not going to have a global meltdown.”

The dollar jumped 1 percent to 119.61 yen as of 10:01 a.m. in New York, after slumping to 116.18 on Monday, the weakest since Jan. 16.

The greenback rose 1.3 percent to $1.1474 per euro, bouncing back after Europe’s single currency gained 5.4 percent in the previous four days, the most since March 2009. The Bloomberg Dollar Spot Index rose 0.4 percent to 1,192.50.

China Acts

“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.

U.S. stocks rose after the Stoxx Europe 600 Index advanced 4.5 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.”

Aussie Rebound

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 3.1 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, rebounding from as low as 20 percent Monday. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.

“The doom and gloom was oversold,” BMO’s Anderson said.

Source: Bloomberg