The euro rose strongly against the dollar yesterday amid worries about China’s stock market rout and possible delay of an interest-rate increase by the US Federal Reserve.
The euro rose 1.5 per cent to $1.1448 against the dollar – and a similar percentage to the UAE dirham, which is pegged to the dollar – in late evening trade yesterday.
This has been driven by a rapid decline in enthusiasm for the carry trade.
Under the practice, investors borrow from countries with low-interest rates that have introduced quantitative easing, chiefly the euro zone, to invest in emerging markets where interest rates are higher.
But worries about slowing economic growth in China have led to diminished expectations of returns from investing in emerging markets, making the carry trade much less attractive.
It has also made the currency of the crisis-hit euro zone a temporary, if unlikely, global safe haven for funds.
Last month marked emerging markets’ worst performance against developed markets since 1998, JPMorgan analysts said in a research note. The current global financial turbulence also makes it less likely that the US central bank would raise interest rates before the end of the year.
Inflationary expectations implied by US bond yields suggest that investors expect an average inflation rate of about 1.5 per cent over the next decade – below the Fed’s target rate of 2 per cent.
China’s move to devalue the yuan this month was the trigger for the biggest bout of financial anxiety since market gyrations over the Fed’s move to curb the supply of cheap money in 2013.
The country, the last remaining global engine of growth, threatens to stall as a succession of negative economic indicators suggests that the global economy’s one bright spot might be about to dim.
Despite official estimates, backed by the IMF, of 7 per cent economic growth in China this year, a host of informal indicators suggests that the world’s largest economy by purchasing power parity is expanding at a slower rate.
Markets seem to have interpreted China’s devaluation move as a sign of panic – and have priced in the implications of a hard economic landing accordingly.
abouyamourn@thenational.ae
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