Sterling took a pummelling yesterday and hit its lowest level for a month before recovering a little ground overnight. The dollar was in demand as risk sentiment soured and investors moved into safe-haven currencies. The stock markets' mood had started to turn last week and worsened over the weekend. Worries over possible contagion from the ongoing problems of the Chinese Evergrande group encouraged investors to liquidate their positions. Sterling didn't fare much better against the euro and gave back some of its recent gains during a volatile session but has opened a little firmer on what is another barren data day.
The euro also suffered against the dollar yesterday but not quite as severely as sterling during a volatile day's trading. Buyers of the single currency were encouraged by Germany publishing its August Producer Price Index, which was up by 1.5% Month on Month and 12% annually. This was a much higher figure than expected, and with the possibility of a less austere government after next weekend's election, traders are now pondering whether their estimates on inflation are too low. An element of profit-taking also supported it, but it remains vulnerable to any hawkish moves by either the Fed or the BoE later in the week.
The dollar benefited yesterday as it always does when risk sentiment turns sour as it did yesterday. The recent travails of China's second-largest property group, Evergrande, spooked investors as fears that it may default on some of its liabilities. With estimates circulating that it may have liabilities up to $400m, worries are that it may hurt the Chinese financial system and impact the world's economic recovery. There is a more risk-on tone to the markets this morning as investors await the opening of the major bourses, and as a result, the dollar is giving back some of the gains it made yesterday.