Traders have pushed back bets on when the Federal Reserve will raise interest rates as China’s devaluation of its currency reverberated through global markets for a second day.
Fed policy makers have kept their main rate, the target for overnight loans between banks, in a zero-to-0.25 percent range since 2008. Traders are pricing in a 40 percent chance the Fed will raise borrowing costs at its September meeting, based on the assumption that the benchmark rate will average 0.375 percent following the increase, data compiled by Bloomberg show. That’s dropped from 54 percent on Aug. 7.
“This reform of the Chinese currency system is adding to dollar strength and also uncertainty,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “What you have to weigh is whether these recent changes in currency and commodity prices are enough to push back the liftoff date. That’s what the market is trying to figure out.”
It’s not just the world’s largest economy seeing a pushback in rate predictions. Forward contracts based on the sterling overnight index average, or Sonia, show traders predict U.K. rates will rise in August, three months later than implied as recently as Tuesday this week.