Dollar jumps 1% after China cuts interest rates

[LONDON] The dollar jumped nearly one percent against a basket of major currencies on Tuesday and recovered from seven-month lows against the safe-haven yen and the euro as riskier assets got a boost from an interest rate cut by the Chinese central bank.

The People's Bank of China (PBOC) said it was lowering the one-year benchmark bank lending rate by 25 basis points to 4.6 per cent, effective from Aug 26. It also relaxed the reserve requirements.

The monetary easing comes after Chinese stock indexes fell more than 7 per cent, hitting their lowest levels since December, following their more than 8-per cent plunge on Monday.

The rate cut brought a relief rally with US stock futures rising 4 per cent and the pan-European FTSEurofirst 300 index jumping 4.2 per cent, recouping the bulk of the 5 per cent-plus it lost the previous day. Commodities also rose.

The dollar rose 1.6 per cent to 120.23 yen while the euro fell 1.3 per cent to US$1.4785, having hit a seven-month peak of US$1.1715 on Monday.

In times of financial stress, the euro and yen are bought as investors unwind positions in trades that entail higher risk but also higher potential return.

"The Chinese rate move has boosted risk appetite," SEB currency strategist Richard Falkenhall said.

"But it's too early to say 'buy the dollar' given all the sharp moves that have happened over the past few days. Longer term, we remain bullish on the dollar."

The dollar has come under pressure against major currencies such as the euro and the yen as fears about Chinese growth and a huge sell-off in global stock markets have thrown into doubt whether the Federal Reserve will raise interest rates this year.

That has also pushed up implied volatility in the foreign exchange market - a broad measure of currency swings - to its highest in two years.

Apart from receding expectations for a Fed rate rise in September, which has seen favourable bets in the dollar being cut, other major and liquid currencies have been helped as the market turmoil prompted the unwinding of carry trades.

Credit Suisse's senior FX strategist for private banking and wealth management in Singapore, Heng Koon How, said Japanese and euro zone policymakers were unlikely to tolerate further sharp rises in the euro and yen.

"I would expect verbal intervention to heat up, should euro head higher towards US$1.20 or dollar/yen trades on a sustained basis below 115," Mr Heng said.

Japanese Finance Minister Taro Aso on Tuesday warned market players against pushing up the yen too much further, saying that its spike against the dollar overnight was "rough" and undesirable for the economy.

REUTERS