Dollar weakness may continue as markets await Fed

So far this week, the U.S. dollar lost 4.0 percent against the yen, while dropping to a seven-month low versus the euro on Monday, as world stock markets slumped and emerging market currencies tumbled.

The dollar’s weakness may continue in the short term, but analysts expect its longer term rally to continue eventually.

The U.S currency is still seen as a safe refuge for those with the closest links to China such as companies and investors operating in Australian, Canadian, and New Zealand dollars as well as a slew of emerging market currencies.
In the short term, two factors may be pressuring the dollar against the euro and yen.

First, an accelerating economic slowdown in China and the resulting volatility in global markets have lowered expectations for a Federal Reserve interest rate rise in September, undermining the attractiveness of U.S. dollar assets.

Second, the slump in world stock markets appears to be spooking traders into unwinding “carry trades” financed largely in low-yielding euros and yen.

“Global risk is elevated right now and so the Federal Reserve would be cautious in hiking interest rates,” said Stephen Jen, a partner at global macro hedge fund SLJ Partners in London. “That support for the dollar is not there at the moment.”

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