US dollar falls, oil recovers as China yuan move seen delaying Fed rate hike

The US dollar fell against the euro and other currencies Wednesday on speculation that the US Federal Reserve will delay hiking interest rates following China's devaluation of the yuan.
The US dollar fell against the euro and other currencies Wednesday on speculation that the US Federal Reserve will delay hiking interest rates following China's devaluation of the yuan.PHOTO: AFP

NEW YORK (AFP, BLOOMBERG) - The US dollar fell against the euro and other currencies Wednesday on speculation that the US Federal Reserve will delay hiking interest rates following China's devaluation of the yuan.

"The dollar took it on the chin," said Joe Manimbo, senior market analyst at Western Union Business Solutions.

Beijing on Tuesday surprised global financial markets by devaluing its currency, the yuan, by nearly two per cent against the US dollar.

A second cut on Wednesday brought reductions this week in the yuan to 3.5 per cent against the dollar.

The dollar had advanced against most rival currencies on Tuesday. But on Wednesday, the greenback declined against the euro, the British pound and the Japanese yen.

"China's cheapening of its currency opened a messy can of worms for markets and suggested the global economy may be worse off than previously thought," Manimbo said.

"Consequently, expectations have diminished for the Fed to raise rates amid fears that slowing growth in China could reach US shores."

Currency traders are closely eyeing US data the rest of the week, especially Thursday's report on US retail sales for July. A strong report could strengthen confidence that the Fed will hike rates in 2015, perhaps as soon as September.

Oil recovered from the lowest close in six years on the weaker dollar drawing investors to crude.

On top of that, the International Energy Agency said global oil demand growth in 2015 will be the strongest in five years. Gasoline surged after US supplies fell, as refineries were said to trim operations.

Oil has dropped about 30 per cent since this year's peak closing price in June amid speculation the global surplus that drove prices into a bear market will persist. Futures have swung between gains and losses this week on mixed signals from China.

"The market is trying to absorb the impact of the Chinese news," Craig Bethune, a fund manager at Manulife Asset Management Ltd. in Toronto who focuses on energy and natural resources investments, said by phone. "The IEA report was bullish on demand growth."

West Texas Intermediate for September delivery rose 22 cents, or 0.5 per cent, to settle at US$43.30 a barrel on the New York Mercantile Exchange. The volume of all futures traded was 78 per cent above the 100-day average. The contract slid US$1.88 to US$43.08 on Tuesday, the lowest close since March 2009.

Brent for September settlement climbed 48 cents, or 1 per cent, to end the session at US$49.66 a barrel on the London- based ICE Futures Europe exchange. The European benchmark crude closed at a US$6.36 premium to WTI.

The dollar fell to its weakest level in a month against the euro, bolstering the appeal of raw materials priced in the U.S. currency as an investment.

This year, global demand for oil will grow at more than twice 2014's pace as low prices spur U.S. consumption and economies recover, the IEA said. World oil use will expand by 1.6 million barrels a day to average 94.2 million. Nevertheless, the oil glut will last through next year, according to the agency.