Investing.com – The U.S. dollar fell sharply on Monday amid concerns over U.S. economic growth, with strong demand for the safe-haven Swiss franc and Japanese yen.
At 08:45 ET (12:45 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, was down 0.9% at 102.100, its lowest level since nearly the start of this year.
Dollar falls on recession fears
The dollar sell-off came after data showed a sharp slowdown in U.S. jobs created in July on Friday, with U.S. Treasury yields falling sharply as traders began pricing in a sharp downturn for the U.S. economy from a prolonged period of high interest rates.
Traders now expect the US to cut interest rates in September, looking for cuts larger than the roughly 50 basis points of cuts previously priced in for this year.
For example, Wells Fargo now expects to cut interest rates by 50 basis points twice at the FOMC meetings in September and November.
This forecast represents a significant shift from previous expectations due to emerging economic indicators, as recent data has raised concerns about the economy.
“The important thing for the dollar is that fears of a US recession mean the market is no longer looking for an orderly adjustment of Fed policy towards some sort of neutral interest rate – say, 3.25%. No, the fear of recession now brings the idea of a stimulative monetary policy,” analysts at ING said in a note.
Demand for Swiss Franc as carry trades decline
In Europe, the Swiss franc rose as traders looked for a form of safety during these turbulent times.
The franc rose to a seven-month high against the dollar, falling 1.4% to 0.8458.
The Swiss currency also benefited from carry trades, where investors borrow money from low-interest-rate economies such as Japan or Switzerland to fund investments in higher-yielding assets elsewhere, which have been popular in recent years.
The pound (dollar) rose 0.6% to 1.0974, amid broad dollar weakness.
Expectations of further cuts by the European Union have also risen, but very few traders have been long the euro since the start of political unrest in France at the end of June.
“Weaker global growth is not good news for the pro-cyclical euro, but the fact that the narrative of ‘US exceptionalism’ may be back on the ground with a vengeance should be supportive for EUR/USD – assuming the Fed is prepared to cut rates sharply,” ING added.
Sterling fell 0.4% against the US dollar to 1.2752, amid concerns that it may also be behind the curve with the Bank of England cutting interest rates just last week.
But even then, policymakers were split 5-4 on whether to cut rates by a quarter-point to 5%, suggesting the central bank will move cautiously in the future.
Yen rises to seven-month high
In Asia, the Japanese yen fell 3.2% to 141.86, with the yen rising to a seven-month high against the dollar as traders aggressively unwinded carry trades amid expectations of a major rate cut by the Federal Reserve.
The yen, which hit a 38-year low against the dollar in July, was also helped by the Bank of Japan’s 15 basis point interest rate hike last week.
“It is hard to argue with USD/JPY extending this correction to the 140 area – which we saw as an outside risk last week,” ING said.
The pound fell 0.6% against the US dollar to 7.1167, with the yuan rising on the weakness of the US dollar even amid concerns about a slowing economy in China.