Dollar Enters Pivotal Week With Crisis-Period Trades Uwinding

  • Commodity currencies staged the steepest gains this week
  • Dollar weakens as futures suggest traders betting Fed on hold

Currency traders are putting the frenzy of August behind them, signaling that global markets have calmed as Federal Reserve policy makers consider raising interest rates for the first time since 2006.

As the final countdown before the Fed’s Sept. 16-17 meeting begins, traders are exiting positions taken on during last month’s market rout. Commodity currencies such as the Australian dollar and South African rand, among the biggest losers in the wake of China’s Aug. 11 yuan devaluation, staged some of the steepest gains this week. The yen, a haven during the August tumult, posted the deepest weekly loss among major currencies.

"What we’re seeing recently is more of a risk-on move,” said Sireen Harajli, a currency strategist at Mizuho Bank Ltd. in New York. “It seems that markets are feeling a little bit more comfortable.”

The yen fell 1.3 percent against the dollar this week, to 120.59 per dollar in New York. The South African rand and the Aussie dollar marked their first weekly advance since China’s unexpected shift on the yuan roiled markets. China is Australia’s largest trading partner.

Subsiding volatility may give Fed officials added confidence as they debate lifting their benchmark rate from near zero, where it’s been since 2008. Policy makers have signaled that they’re watching the market in the leadup to the meeting. New York Fed President William C. Dudley said last month that the turbulence at the time made the case for a September move “less compelling.”

Fed Watch

Traders have yet to ramp up bets that the central bank will increase interest rates this month. Fed fund futures show a 28 percent chance of a move, down from 38 percent on Aug. 31. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.

With many traders leaning toward the Fed holding tight, the dollar sank against most major currencies this week. The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, had its first weekly decline since August. The dollar weakened 1.7 percent this week to $1.1338 per euro.

"I could see why people want to de-risk heading into the meeting," said Daniel Brehon, a New York-based currency strategist at Deutsche Bank AG. "The dollar longs are still the consensus position out there,” he said, referring to bets the U.S. currency will gain.

“To the extent that all positions are being wound down, the dollar’s going to fall in the lead up to the Fed," he said.