The U.S. dollar fell sharply on concerns about U.S. economic growth, while the Swiss franc and Japanese yen saw strong safe-haven demand.
Dollar Loses Ground on Recession Fears
The dollar’s sell-off came after data released on Friday showed a significant cooling in U.S. job creation in July, and U.S. Treasury yields fell as traders began to consider the likelihood of a hard landing for the U.S. economy due to the prolonged period of high interest rates.
Traders now expect the Federal Reserve to cut interest rates in September, and anticipate larger cuts than the previously expected 50 basis points at the September and November Federal Open Market Committee meetings.
Wells Fargo now estimates two 50 basis point rate cuts at the Federal Open Market Committee meetings in September and November.
This forecast marks a considerable change from past predictions due to emerging economic indicators, with recent data raising concerns about the economy.
Swiss Franc in Demand as Carry Trades Unwind
In Europe, the Swiss franc soared as traders sought safety in this turbulent environment.
The Swiss franc hit a seven-month high against the dollar, with USD/CHF losing nearly 1.4% to 0.8458.
The Swiss currency also benefited from the unwinding of carry trades, in which investors borrow money from low-interest-rate economies such as Japan or Switzerland to finance investments in higher-yielding assets elsewhere, a strategy that has gained popularity recently.
The EUR/USD rose nearly 0.6% to 1.0974 due to the dollar’s general weakness.
Expectations of further cuts by the European Central Bank have also increased, although very few traders have been long on the euro since the start of the political turmoil in France at the end of June.
Weaker global growth is not good for the pro-cyclical euro, although the fact that the narrative of U.S. exceptionalism could come back to earth with a bump should support EUR/USD, given that the Fed is poised to cut rates sharply.
GBP/USD lost 0.4% to 1.2752 on fears that the Bank of England will also delay, as the UK central bank did not cut interest rates until the previous week.
Moreover, the decision to cut rates by a quarter point to 5% was split among policymakers (5-4), indicating that the central bank may remain cautious going forward.
Yen Hits Seven-Month High
USD/JPY sank 3.2% in Asia to 141.86, and the yen hit a seven-month high against the dollar as traders unwound their carry trades in anticipation of major rate cuts by the Federal Reserve.
The rise in 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 rate hike last week.
The USD/CNY was down 0.6% to 7.1167, and the yuan rallied due to a weaker dollar, despite uncertainty about the economic slowdown in China.
