Against the yen, the dollar dropped 2.04% to 143.5, close to the weakest level for the year
A surge in the yen to a seven-month high led a broad dollar decline, as a slew of economic data last week raised the prospect of a U.S. economic downturn and bigger interest rate cuts from the Fed.
The dollar index was down 0.46% to 102.68, after dipping as low as 102.15, its weakest since January 12.
Against the yen, the dollar dropped 2.04% to 143.5, close to the weakest level for the year. The euro was up 0.37% to $1.095, after rising as high as $1.1009, its strongest since January 2.
When you zoom out and look at the big picture, whenever there is a crisis in markets, it is clear that there is far too much leverage and everyone is crowded into the same trades, according to Adam Button, chief currency analyst at ForexLive.
Treasury yields have been dropping sharply since last week, when the Federal Reserve kept the policy rate in its current 5.25% to 5.50% range while Fed Chair Jerome Powell opened the possibility of a rate cut in September.
But by Friday, after data showed the unemployment rate had jumped, expectations for rate cuts rose.
Friday’s non-farm payrolls report was a bit of a shock to the global system, and markets are very concerned that the U.S. may no longer be a viable driver of global growth, according to Helen Given, FX trader at Monex USA in Washington.
Whenever there is trouble, the rush to the exit is so dramatic that it creates these incredible waves in markets that swamp related markets, according to Button. You never know how much money is piled into the carry trade until it unwinds.
On Monday, Fed fund futures reflected traders pricing a near 100% probability of a 50 bp cut at the central bank’s September meeting, as per CME FedWatch.
The Japanese equity sell-off during Asian trading spooked markets in a big way, coupled with the yen’s rise, and we may be seeing the so-called ‘panic spiral’ that many have been concerned about, Given said.
Meanwhile, the Swiss franc, another popular carry trade funding currency, was 0.83% higher at 0.85 to the dollar. The franc, a traditional safe haven, was also trading near a seven-month high.
The dollar found some relief against the British pound as the marked deterioration in global investor risk sentiment reduced demand for riskier currencies.
