US Dollar in Free Fall: Nervous Markets and Japanese Yen Under Pressure

The US dollar is currently suffering heavy losses, and the yen is also showing weakness after a previous rise. This is happening amidst the unwinding of popular carry trades and the prospect of significant interest rate cuts by the Federal Reserve. The yen, which fell by 1% to 145.78 per dollar on Tuesday, had previously gained in five consecutive sessions, reaching a seven-month high of 141.675 on Monday. The yen is also weaker against the Australian dollar, the euro, and the British pound. Global markets are in sell-off mode, triggered by weaker-than-expected US employment data and disappointing results from major tech companies, along with growing concerns about the Chinese economy. This has led to a massive sell-off of stocks, oil, and high-yield currencies. The situation worsened on Monday when fears of a potential recession in the US panicked investors. However, US central bank policymakers pointed out that weaker July employment data do not mean the economy is in free fall, though they warned that rate cuts are necessary to avoid this scenario. "Sell-offs that manifest through sharp fluctuations in the currency markets are intense and rapid, but usually short-lived," said Jamie Cox, Managing Partner at Harris Financial Group. "The markets are obviously jittery due to the divergent paths taken by central banks, leading to significant volatility." Traders are now anticipating rate cuts of 109 basis points (bps) by the Fed this year, with a 75% probability of a 50 bps cut in September, according to the CME FedWatch Tool. The rise of the yen also comes in the wake of the recent interest rate hike by the Bank of Japan and significant unwinding of carry trade positions, where investors borrow money from economies with low interest rates like Japan or Switzerland to invest in higher-yielding assets. The outlook for the yen has changed since Tokyo's intervention to support the currency last month, enabling it to recover from a 38-year low of 161.96 per dollar. "The conditions for yen-financed carry trades have been set for some time," said James Athey, fixed-income portfolio manager at Marlborough Investment Management. "However, the yen was extremely undervalued, and with all other conditions changing, like in 2008, the yen appreciation in such cases can be swift and aggressive." The dollar index, which measures the US dollar against six competitors, stood at 102.87 in early trade after hitting a seven-month low of 102.15 on Monday. The euro remained largely unchanged at $1.095275, while the British pound was slightly stronger at $1.2789.