A semblance of calm has returned to the foreign exchange market today after the more pronounced movements of recent days. The US dollar strengthened against a basket of leading global currencies and settled around a seven-month high against the yen, having fallen by around six per cent against the yen over the past five trading days.
The dollar index
At around 17:15 CET, the dollar index, which measures the value of the dollar against a basket of six leading world currencies, was up 0.3 percent at 102.95 points. The euro fell 0.2 percent against the dollar to $1.0930. The dollar gained 0.5 percent against the yen to JPY144.76. The euro rose 0.2 percent against the yen to JPY158.14.
“Some of the moves in the last few days seem to have been exaggerated,” Corpay strategist Karl Schamotta told Reuters. “We see demand for safe-haven investments fading and flows in most major currency pairs returning to normal,” he added.
Volatility
The yen’s recent rise has been caused by increased volatility, which has prompted investors to abandon the previously popular so-called carry trade, where investors borrow against low-yielding currencies to invest in higher-yielding ones. This trend was then reinforced by the Bank of Japan’s decision on Friday to raise interest rates.
Traders’ speculation on what the US Federal Reserve’s (Fed) next policy will be is also contributing to the rate movements. Traders now expect the Fed to cut interest rates by 1.1 percentage points this year. The probability that the Fed will cut interest rates by 0.5 percentage point in September is now 76 percent.
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