Reassessment Across Equity Markets
Equity markets also experienced a reassessment, with Japan’s Nikkei index gaining 10% after a 12% decline the previous day. European shares similarly attempted to recover. According to Nick Rees, a currency analyst at Monex Europe, markets appeared to have overreacted recently and are now recalibrating, leading to the dollar’s recovery and an uptick in dollar/yen.
Impact of Bank of Japan and US Job Data
The yen’s recent strength was influenced by increased volatility and a surge in investors exiting popular carry trades, compounded by the Bank of Japan’s interest rate hike last Friday. Concurrently, weaker-than-expected US job data and disappointing earnings from major tech firms triggered a global equity sell-off, further driving the unwind of carry trades.
Dollar Strengthens Against Other Currencies
The Swiss franc, another favored funding currency for carry trades, weakened, with the dollar up 0.12% at 0.8533 francs. The franc had strengthened sharply since mid-July due to the unwinding of carry trades and safe-haven flows. The dollar also gained ground against the euro and pound, with the euro down 0.38% at $1.091 and the pound falling 0.77% to $1.275, its lowest in five weeks following the Bank of England’s recent rate cut.
Federal Reserve Policy and Treasury Yields
Currency market movements were also influenced by traders’ attempts to anticipate US Federal Reserve policy. Markets now expect 110 basis points of easing this year from the Fed, with a 70% chance of a 50 basis point cut in September. Despite weaker job data, Fed policymakers indicated that while the economy is not in recessionary freefall, rate cuts will be necessary to avoid such an outcome.
Treasury yields rebounded on Tuesday as investors monitored a reversal of the previous day’s market sell-off. The yield on the 10-year Treasury note rose 4 basis points to 3.82%, while the 2-year Treasury note yield increased by over 5 basis points to 3.932%.
Gold and Cryptocurrencies React to Market Movements
Gold prices turned lower on Tuesday as Treasury yields and the US dollar rose. The strengthening dollar and higher yields typically reduce the appeal of non-yielding assets like gold. Investors are closely watching the Federal Reserve’s next moves, as rate cuts could influence gold prices.
