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The second unexpected devaluation of the Chinese currency CNY caused some turbulent market movements in currencies today.

I was surprised that the EUR went to a 1-week high against the USD up by almost 1.5% on a single day to a 1-month high.

Can someone explain why the CNY devalutation would benefit the EUR and harm the USD?

As we know, the EUR offers a negative ECB rate, while the fed is expected to raise its rate, hence I expected the USD to rise vs. the EUR. Then I thought that maybe together with a solution of the Greek debt crisis markets preferred going into EUR and saw the USD already overvalued.

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    $\begingroup$ It should be understand that CNY is devalued RELATIVE TO the USD as Chinese gov peg its CNY to the US dollar. So clearly a devaluation of CNY will harm US exporter. Havent found out a good explanation for EUR. $\endgroup$ – SiXUlm Aug 13 '15 at 2:08
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    $\begingroup$ I think your last paragraph already provides some explanantions: 1) A solution for Greek debt crisis 2) Fed was expected to raise the interest rate. But the very recent action of PBOC will harms the US economy. Fed would not be expected to raise anymore for 2 reasons: to avoid worsening the already-bad market and to reduce the effects of that action to the its economy. $\endgroup$ – SiXUlm Aug 13 '15 at 2:34
  • $\begingroup$ Hi SixUlm, why don't make it an answer? $\endgroup$ – Bob Jansen♦ Aug 13 '15 at 6:30
  • $\begingroup$ What about all the people exiting their carry trades? If they borrowed in EUR they have to buy a bunch of EUR to pay off some of their loans. USD could also be down if the expectation of a September rate hike decreased on worries of global weakness. $\endgroup$ – meh Aug 13 '15 at 12:13
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Today (1 day after the fact) the following headline appeared in the Financial Times: "September Fed rate lift-off put in doubt, Fallout from China’s currency move turns market mood". If true, this would certainly explain why the USD declined (i.e. the interest rate rise that everyone expected has been postponed). However, in my experience it is very hard to understand these things as they happen or before they happen. After the fact, once you know what happened, many explanations look plausible, but they are impossible to check against each other. The public wants an explanation. but the markets are complex and not easy to decipher.

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  • $\begingroup$ @EMCOR, clearly this discussion shows why people are going to sell USD, but in exchange for what? Looks like some chose EUR. $\endgroup$ – rupweb Aug 14 '15 at 8:33
  • $\begingroup$ @rupweb Yes, 90% of currency market is only EUR and USD,hence I would naturally expect EUR to be the next best choice after USD. $\endgroup$ – emcor Aug 14 '15 at 10:32

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