China jitters lift haven currencies; dollar awaits Fed

The dollar was pinned below recent highs by a decline in real yields and by trepidation ahead of a Federal Reserve meeting. In the meanwhile, other safe-haven currencies were in favour following an unnerving plunge in Chinese equity markets. The Japanese yen rose about 0.5% on the dollar overnight.

The Chinese yuan teetered near a three-month low at 6.5180 per dollar. This is while the risk-sensitive Australian and New Zealand dollars also nursed losses as sentiment took a hit. Hong Kong’s Hang Seng Index suffered its sharpest selloff in more than a year. This is amid the growing fears about a Chinese government crackdown on tech and other sectors and jitters spilled over into U.S. markets. Westpac strategist Imre Speizer said that the fall in Chinese markets caused a ripple effect to global sentiment and it was a risk-off session. The gains by the yen, euro and franc combined to push the U.S. dollar index lower.

Sterling was an outlier and it jumped through its 20-day moving average overnight. This is as the traders took reports that Britain was considering opening borders as a signal of further re-opening benefits to come. Focus turns now to how Chinese markets trade at the open and to investors’ positioning ahead of the Fed meeting. The dollar has enjoyed a month-long rally. And that is after a hawkish shift from the Fed in June. Hints of a faster end to extraordinary policy support could lift U.S. rates. The Fed publishes a statement at 1800 GMT followed by a news conference. Another hawkish surprise is unlikely, Westpac’s Speizer said, with investors likely left looking for any shifts in tone or emphasis. He said that they have already said that they are talking about tapering. And they have already said transitory inflation. And that there will be subtle changes in the language that cause the reaction.