A month ago China's stock bubble was bursting and Greece was imploding. Yet
the US Fed, in a violation of both headline sentiment and common sense, was
still promising
to raise interest rates come September.
Fast forward to this week. China's surprise currency devaluation has sent
the global markets into a tailspin, but rather than spiking on the sudden drop
in a major trading partner currency, the US dollar is plunging against the
euro and most other currencies. Why? Because a global currency crisis is just
about the last situation in which the world's major central bank would be expected
to tighten.
Suddenly, traders are concluding that maybe rates won't rise after all:
Fallout
from China's yuan devaluation weakens dollar
(MarketWatch) - The dollar weakened against most of its emerging-markets
and industrialized rivals Wednesday as investors fretted that China's devaluation
of the yuan could cause Federal Reserve officials to delay an expected increase
in their benchmark interest rate.
The ICE U.S. Dollar index DXY, -1.16% , a measure of the dollar's strength
against a basket of six rival currencies, was down 1% to 95.9920.
China's decision to let the yuan drop caused emerging-markets currencies
in Asia and elsewhere to depreciate in sympathy, as some investors anticipated
central banks around the world will shift to a more accommodative monetary
policy. This would push the dollar even higher, which could cause the Federal
Reserve to hold off on raising interest rates for fear that the dollar has
become too much of a drag on U.S. economic growth.
"The China move on FX, rightly or wrongly, is being seen as something that's
muting the policy divergence theme," said Josh O'Byrne, G-10 FX Strategist
at Citigroup.
Speculators unwinding bets on emerging-markets currencies also helped push
the dollar lower, as they bought back the euros and yen they had used to
fund those trades, said Jane Foley, senior currency strategist at Rabobank.
The euro EURUSD, +1.3222% rose 1.4% to $1.1197 from $1.1044 late Tuesday
in New York, while the dollar shed 1% against the yen USDJPY, -0.94% to trade
at ¥123.88 down from ¥125.07 late Tuesday.
So now we have currency turmoil in the developing world, equity corrections
and possibly bear markets in the developed world, and deflation pretty much
everywhere. None of this argues for a stronger dollar or higher interest rates.
Even before the latest shock, the Fed was starting to accommodate this view
by sending out talking heads to make the soften the September rate hike. From MarketWatch over
the weekend:
...But comments from Federal Reserve Vice Chairman Stanley Fischer on Monday
may have helped ease some of those concerns. He told Bloomberg TV he doesn't
expect the first interest-rate hike by the U.S. central bank in more than
nine years to occur until after inflation returns closer to the Fed's target
of around 2%.
Another week like this one and the idea of any central bank anywhere raising
interest rates will be laughed out of the room.
