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Fear of Fed, China devaluation driving volatility: Timmer

The relationship between China's currency devaluation and the Federal Reserve's anticipated monetary tightening is driving stock market volatility, Fidelity Investments' Jurrien Timmer said Tuesday.

"I'm thinking they should not hike" in September, he told CNBC's "Squawk on the Street". "It is potentially a policy error because the market will tighten for them, as is already happening to some degree."

Investors are growing concerned about just such an error, he said. The VIX, which measures stock market volatility, jumped nearly 135 percent in August, its biggest monthly gain since 1990.

China rocked markets last month after it devalued its currency, feeding fears that the country's leaders are losing confidence in their ability to hit economic targets and sending major U.S. averages into correction.

Read More Weak China August factory, services point to further economic slowdown

China's currency devaluation has been seen as a way to support flagging exports and bring the country in line with international standards. But the perception that it was also a bid to put off a Fed rate hike is feeding volatilty, as well, Timmer said.

"If you believe that the Chinese devalued the currency a few weeks ago in anticipation of a September liftoff, ... then the Chinese devalued to ward that off," he said. "The market went into a tailspin, and then the odds of a September liftoff were greatly reduced to something like 20 percent and everything kind of got calm again."

Higher interest rates would presumably increase the value of the dollar, which would also lift the greenback-linked yuan, making China's products more expensive to foreign buyers.

"If the Fed is going to go in September after all then it puts China back on the hot seat in terms of what it does with its currency," Timmer said.

Should China continue to devalue its currency, it will feed deflation around the world, he added. That would put the Fed on hold because it would face a tougher time hitting its 2 percent inflation target.