The greenback weakened to its lowest level in almost a year versus the yen after a 7% rout in China’s equity markets curtailed trading for the second time in four days. China’s foreign-exchange reserves slid more than forecast in December, capping their first-ever annual decline, prompting speculation that authorities are selling dollars to prop up the currency. Shorter-term U.S. debt yields declined and futures contracts show a 43% probability of a U.S. interest-rate rise by April, down from 56% on Dec. 31.
Investors are starting to question whether the Federal Reserve can shrug off turmoil in the world’s second-largest economy to proceed with the four rate increases it projects by year-end. Policy makers will assess “international developments” as they consider the timing and size of increases to the benchmark rate, minutes from their latest meeting show. Emerging-market turmoil in August and September, particularly in China, was among reasons the Fed refrained from raising rates until December.
“It’s reflections of August of last year,” said Chris Gaffney, president at EverBank World Markets in St. Louis. “The Fed is monitoring global growth and that will come into play as far as the timing of the next rate increase, and we’re already seeing that impact the markets.” China won’t have as big an effect as last year because the Fed has lifted rates off zero, Gaffney said.
The Bloomberg Dollar Spot Index, which tracks the currency versus 10 peers, fell 0.4% to 1,237.09 as of 5 p.m. in New York, the largest decline since Dec. 9 and the first loss in nine days.
The yen rose 0.7% to 117.67 per dollar, the strongest on a closing basis since Feb. 5. Chinese stocks fell 8.5% in Shanghai that day, fueling volatility and risk aversion that spread around the world.
China’s stock selloff continued as the central bank reduced the yuan’s reference rate — the midpoint of the band in which the currency’s permitted to trade — to the weakest since March 2011.
While the Fed won’t react by saying it will stick to one rate increase, policy makers may acknowledge the importance of global markets and financial conditions when considering future policy, Bill Gross, co-manager of the $1.3 billion Janus Global Unconstrained Bond Fund, said in an interview on Bloomberg Television with Tom Keene.
A slower Chinese economy may have spillover effects on the U.S., Richmond Fed President Jeffrey Lacker said Thursday, while urging caution in reacting. A reduced likelihood of an April Fed rate increase is based on the assumption that the effective fed funds rate will trade at the middle of the central bank’s target range after the next increase.
China has a major adjustment problem that “amounts to a crisis,” according to billionaire George Soros. Soros, who’s worth about $27.3 billion according to the Bloomberg Billionaires Index, sees the nation’s currency devaluation transferring problems to the rest of the world, he said at an economic forum in Sri Lanka.
U.S. policy makers will “be sensitive to significant bouts of risk-off as they’re thinking about continuing to raise rates,” said Ian Gordon, a foreign-exchange strategist at Bank of America Corp. in New York. “It’s not necessarily to the point where the Fed would necessarily respond to it, but if we see a sustained impact on financial markets which gets back to a level where we were over the summer that would make them very cautious.”
©2016 Bloomberg News