Dollar Slumps on Recession Fears
The U.S. dollar slumps sharply on recession fears about U.S. economic growth. Safe-haven demand increased for the Swiss franc and the Japanese yen. At 08:45 ET (12:45 GMT), the Dollar Index traded 0.9% lower to 102.100. This marked its lowest level since the start of the year.
Weaker Dollar and Recession Fears
The dollar’s decline followed data showing a sharp cooling in U.S. job creation in July. U.S. Treasury yields dropped significantly as traders anticipated a hard landing for the U.S. economy. This is due to prolonged elevated interest rates. Traders now fully expect the U.S. Federal Reserve to cut interest rates in September. They are looking for more substantial cuts than previously predicted. Wells Fargo projects two 50 basis-point rate cuts at the FOMC meetings in September and November.
Shift in Fed Policy Expectations
Analysts at ING noted that fears of a U.S. recession mean the market no longer expects an orderly adjustment in Fed policy. Instead, there is now an expectation of stimulative monetary policy. This marks a substantial shift from earlier forecasts due to emerging economic indicators.
Swiss Franc Benefits from Carry Trades
In Europe, the Swiss franc soared as traders sought safety. The franc climbed to a seven-month high against the dollar. The USD/CHF was down 1.4% at 0.8458. The Swiss currency also benefited from the unwinding of carry trades. Investors had borrowed in money from low-interest-rate economies like Japan or Switzerland. They used this to fund investments in higher-yielding assets elsewhere.
Yen Surges to Seven-Month High
In Asia, the USD/JPY slumped 3.2% to 141.86. The yen surged to seven-month highs against the dollar. Traders aggressively unwound carry trades in anticipation of substantial rate cuts from the Federal Reserve. The rebound in the yen was also helped by the Bank of Japan’s recent rate rise.
Impact on Other Currencies
The EUR/USD rose 0.6% to 1.0974, given the broadly weaker dollar. Expectations for more cuts by the European Central Bank have risen. GBP/USD slipped 0.4% to 1.2752 amid fears that the Bank of England may be behind the curve.
