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With the countdown to the Federal Reserve's September meeting underway, volatility is returning to global currency markets.
A gauge of price swings extended its longest streak of gains since January this week amid anxieties about the Fed's path and a renewed focus on China's slowdown. Foreign-exchange investors pared positions and moved to traditional havens even as US economic reports show continued growth.
"They're hedging their bets across the board because these are major unknowns that could cause substantial volatility or moves in one direction or another," Jennifer Vail, head of fixed-income research in Portland, Oregon, at US Bank Wealth Management, said by phone. "There are way too many variables out there."
Currency volatility rose for a fifth straight week, according to JPMorgan Chase & Co's measure of price swings in global foreign exchange.
The yen rose 2.2 per cent this week, the most since December, to 118.99 per dollar in New York. The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, advanced 5.2 per cent to 1,213.86.
Hedge funds and other large speculators pared positions that profit from dollar strength for a third consecutive week in the period through September 1, the longest pessimistic streak since May, data from the Commodity Futures Trading Commission showed.
Traders are torn on when the Fed will raise interest rates, with Bill Gross of Janus Capital Management seeing an even chance that the Fed could raise or hold rates when it meets September 16-17. Investors scaled back expectations for the US's first rate increase since 2006 after a selloff in China became a global stock-market rout.
Concern that China's slowdown will translate into sluggish growth overseas offset Friday's labour report, which showed better-than-forecast wage growth in the US.
The dollar has gained 9.1 per cent this year among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen is up 9.8 per cent, while the euro is down 0.4 per cent.
"There's uncertainty about US central-bank policy," said Fabian Eliasson, head of US corporate foreign-exchange sales in New York at Mizuho Financial Group Inc. "Definitely the volatility's back."
Bank of England set to maintain record-low rate
Bank of England officials will probably keep interest rates at a record low this month, as fluctuations in financial markets, a slowdown in China and a drop in oil prices cloud the outlook.
Policy makers seeking to chart a course away from ultra loose policy have to weigh international risks that are running counter to domestic expansion. While Governor Mark Carney said on August 29 that market turmoil hasn't pushed back the prospect for higher borrowing costs, it will probably be enough to keep Ian McCafferty - last month's sole dissenter - on his own in insisting that higher rates are needed now, according to a Bloomberg News survey.
"There's no hurry to raise rates so they can wait to see how the emerging-market volatility plays out," said Philip Shaw, an economist at Investec Securities in London. "I don't see anything in the past month that would cause any of the members to change their view." McCafferty will maintain his call to increase the key rate to 0.75 per cent, with the remaining eight officials voting to keep it at 0.5 per cent, the survey showed.
