Carry Trade Crunch Jolts Currency Markets

The US dollar was down sharply on Tuesday, with the yen falling after a big surge the day before as traders dealt with the unwinding of popular carry trades and the potential of substantial Federal Reserve rate cuts.

The yen fell to 144.47 per dollar on Tuesday, after climbing for five consecutive sessions and reaching a seven-month high of 141.675 on Monday. The yen also fell versus the Australian dollar, euro, and pound.

Last week’s weaker-than-expected US job data, combined with dismal profits from key tech firms and growing fears about the Chinese economy, caused a global sell-off in stocks and high-yielding currencies.

On Monday, the global rush out of riskier assets took a stunning turn, with equity markets in meltdown mode as fears that the United States is headed for a recession roiled investors.

On Monday, US central bank governors pushed back against the notion that weaker-than-expected July job data meant the economy is in a recessionary freefall, but also warned that the Federal Reserve will need to decrease interest rates to avert such a result.

According to the CME FedWatch tool, traders now expect the Fed to ease by 109 basis points (bps) this year, with a 50 basis point decrease in September priced in at a 75% possibility.

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