Written by Ankur Banerjee
SINGAPORE (Reuters) – The U.S. dollar suffered sharp losses on Tuesday as the yen retreated after a sharp rise in the previous session as traders faced the prospect of a sharp rate cut by the Federal Reserve.
The yen fell 0.89 percent on Tuesday to 145.48 yen per dollar, after rising for five straight sessions and hitting a seven-month high of 141.675 yen on Monday. The yen also fell against the Australian dollar, the euro and the British pound.
Weaker-than-expected U.S. jobs data last week, coupled with disappointing earnings from big tech companies and growing concerns about the Chinese economy, sparked a global sell-off in stocks and high-yielding currencies.
On Monday, the global rush into riskier assets took a stunning turn as investors were concerned that the United States was headed toward a recession.
U.S. central bank policymakers on Monday rejected the idea that weaker-than-expected July jobs data meant the economy was in free fall, but they also warned that the Federal Reserve would need to cut interest rates to avoid such an outcome.
“The sell-offs that manifest themselves through wild volatility in the currency markets are sharp and rapid, but they are usually short-lived,” said Jamie Cox, managing partner at Harris Financial Group.
“Markets are clearly nervous about the divergent paths that central banks are taking, leading to a lot of volatility.”
Traders now expect the Fed to ease rates by 110 basis points this year, with a 75% chance of a 50 basis point cut in September, according to the CME FedWatch tool. Traders had fully priced in a 50 basis point cut on Monday.
“We are keeping a degree of calm because we do not expect any overreaction from central bankers,” said Christian Sherman, US economist at DWS.
Sherman said Federal Reserve Chairman Jerome Powell is likely to provide critical guidance at this year’s Jackson Hole Economic Symposium in August.
yen rise
The yen’s rise also comes after the Bank of Japan hiked interest rates last week in a hawkish move and sharp unwinding of carry trades as investors rushed out of the way of the rising currency.
In the carry trade, investors borrow money from economies with low interest rates, such as Japan or Switzerland, to finance investments in higher-yielding assets elsewhere.
Data from the Commodity Futures Trading Commission last week showed that speculators’ bets on the yen falling have fallen to $6 billion from a nearly decade-high of $14.5 billion in April.
The yen has been on a tear since Tokyo spent $36.8 billion last month in bouts of intervention, lifting the yen away from a 38-year low of 161.96 per dollar where it was rooted just a month ago.
Edana Opiyo, portfolio manager at First Eagle Investments, still sees the yen as undervalued and expects it to rise in the medium term.
“However, short-term moves are difficult to predict and appear to be more sensitive to developments in the US.”
The US dollar index, which measures the greenback’s value against six rival currencies, last stood at 102.87 after touching a seven-month low of 102.15 on Monday.
The Australian dollar rose 0.44% to $0.6525 after comments from Reserve Bank of Australia Governor Michelle Bullock suggested that an interest rate cut was still a long way off.
Bullock said that cutting interest rates is not on the agenda in the near term, adding that the central bank is prepared to raise interest rates if necessary.
Australia’s central bank kept interest rates steady on Tuesday as expected, while stressing that it is not ruling out anything to control inflation.
Sterling fell to a more than eight-month low of $0.63485 on Monday, taking its losses since the start of the year to more than 4% this year as risk sentiment deteriorated.
The euro was steady at $1.09535, below a seven-month high of $1.1009 hit on Monday. The pound was last at $1.27765.
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