Dollar Recovers as Equity Markets Stabilize

The dollar rose on Wednesday as fragile global stock markets stabilized, taking the heat out of a rush to unwind carry trades that have boosted the safe-haven yen and the low-yielding euro in the past few weeks.

A spike in risk aversion due to slowing Chinese and global growth prompted investors to cut unfavorable bets in the yen and the euro, both of which have been popular funding currencies for carry trades. Such trades involve selling low-yielding currencies to buy riskier, higher-yielding assets.

The dollar was up 0.6 percent at 120 yen, rising from a low of 119.225 yen as a sense of calm returned to equity markets with U.S. stock futures pointing to gains on Wall Street. The yen had jumped about 1.6 percent on Tuesday when global stocks, including Wall Street, fell sharply.

With eyes also on Thursday's European Central Bank meeting, the euro fell 0.5 percent to $1.1250, having rallied 0.9 percent on Tuesday when it rose to $1.1332.

"There has been a moderation in risk aversion with European stocks and Wall Street stock futures in the green. That has seen the yen give up some of its recent gains," Alvin Tan, currency strategist at Societe Generale, said.

"U.S. payrolls will be the focus, but I doubt it will change the current debate over whether the Federal Reserve will hike rates in the near term or not."

A report showing weakness in U.S. factories on Tuesday added to the gloom over the global economy, sending the S&P 500 down 2.5 percent.

On Wednesday, investors will comb the ADP employment report as a rough predictor of the more comprehensive U.S. non-farm payrolls due on Friday. Analysts said only if the jobs report shows a huge jump in average earnings will investors start to price in a good chance of a Fed hike in September.

Meanwhile, the Australian dollar earlier hit a 6-1/2 year low of $0.6982, pummeled by sliding oil and commodity prices. Its decline was accelerated by weaker-than-expected domestic growth in the second quarter due to falling exports, and was last trading 0.3 percent lower at $0.6995.

China is a big export market for Australia and the Aussie is used as a liquid proxy for exposure to that country.

"The lack of inflation pressures in the (Australian) economy coupled with our expectation that the value of the yuan against the dollar is set to continuing falling in the months ahead, underpins our expectations that the central bank will cut rates again," Jane Foley, senior currency strategist at Rabobank, said.

"On the back of today's weak economic data, we have lowered our bearish forecasts for the Australian dollar even further and see scope for a move towards $0.68 on a six-month view." (Editing by John Stonestreet and Jane Merriman)