The dollar jumped one percent against a basket of major currencies on Tuesday and recovered from seven-month lows against the safe-haven yen and euro as riskier assets got a boost from an interest rate cut by the Chinese central bank.
The People's Bank of China (PBOC) said it was lowering the one-year benchmark bank lending rate by 25 basis points to 4.6 percent, effective Aug. 26. It also relaxed reserve requirements.
The monetary easing came after Chinese stock indexes fell more than 7 percent, hitting their lowest levels since December, following their more than 8 percent plunge on Monday. The rate cut brought a relief rally, with U.S. and European shares rebounding sharply. Commodities prices also rose.
"The dollar strength today is a direct consequence of the PBOC's actions," said Douglas Borthwick, managing director at Chapdelaine Foreign Exchange in New York. He said, however, that volatility was likely to continue.
The U.S. dollar index, which measures the greenback against a basket of six major currencies, was last up 1.28 percent at 94.53. The dollar was last up 0.91 percent against the safe-haven yen at 119.77 yen, while the euro was last down 1.45percent against the greenback at $1.1423.
Analysts said the PBOC move, which came amid concerns over an economic slowdown in China, increased risk appetite by lending more stability to markets.
"The Chinese slowdown is the biggest domino piece that is starting to tumble a little bit," said Alfonso Esparza, senior currency strategist at Oanda in Toronto. He said the PBOC response renewed focus on U.S. economic data and a potential Federal Reserve rate hike this year.
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The dollar has come under pressure against major currencies such as the euro and the yen as fears about Chinese growth and a huge selloff in global stock markets have thrown into doubt whether the Fed will raise interest rates this year.
Fed rate hikes are expected to boost the dollar by driving investment flows into the United States.
The concerns over China and Monday's selloff in global markets also pushed up implied volatility in the foreign exchange market, a broad measure of currency swings, to its highest in two years.
Against the , the dollar was last up 1.42 percent at 0.9450 franc.
The Brazilian real slid 1.5 percent and crossed the psychologically important level of 3.6 per dollar for the first time in more than 12 years as traders worried about a growing political crisis in Latin America's largest economy.
The Brazilian currency extended losses even as other emerging market currencies steadied following a decision by the Chinese central bank to cut interest rates.
The real closed Tuesday at 3.6072 per dollar, its weakest level since early 2003.