Investing.com -- EUR/USD soared more than 1% on Thursday as a massive sell-off in China exacerbated fears of a global economic slowdown, bolstering dovish arguments for a delayed interest rate hike by the Federal Reserve as it embarks on its first tightening cycle in a decade.
The currency pair traded in a broad range between 1.0711 and 1.0940, before settling at 1.0928, up 1.40% on the session. The euro posted its strongest its one-day move against the dollar since December 3 when the European Central Bank roiled global foreign exchange markets by only approving limited easing measures with its comprehensive quantitative easing program at a closely-watched meeting in Frankfurt. Over the last month, the euro is relatively flat against the dollar, up 0.43% since December 7.
EUR/USD likely gained support at 1.0538, the low from Dec. 3 and was met with resistance at 1.1352, the high from Oct. 22.
In overnight trading, China's benchmark Shanghai Composite Index plummeted 7% within a half-hour of the start of trading, prompting its second circuit breaker in the span of four days. Earlier, the PBOC set the midpoint of the yuan at 6.5646 against the dollar, 0.51% lower than the previous day's rate, representing the sharpest fall in the daily fixings since the currency's massive depreciation in mid-August. In Tuesday's session, the PBOC set the yuan's midpoint at 6.5314, its lowest level since February, 2011.
On Tuesday morning, the PBOC injected 130 billion yuan into the nation's open-market operations, its most since September, after weak manufacturing data last month sparked fresh concerns of a further slowdown in the world's second-largest economy. Then on Wednesday, Markit said China's Caixin services PMI index for December fell to a 17-month low at 50.2, its second-lowest level on record. Some experts view the latest intervention by the Chinese central bank as a desperate move to jumpstart its flagging economy by bolstering exports. At Thursday's low of 6.60007 versus the dollar, the yuan fell to its lowest level against the greenback in five years.
The latest crash in Chinese equities mirrors a sell-off from late-August when the PBOC devalued the yuan by its highest level in more than two decades, shocking equity markets worldwide. On August 11, the PBOC changed its mechanism for pricing the yuan's midpoint by simply basing it on the prior day's close. Previously, major state-owned banks nationwide submitted a CNY/USD exchange rate to the PBOC each morning, which calculated an average to determine the midpoint. Over the course of a trading day, the PBOC intervenes to prevent the exchange rate from drifting 2% above or below the midpoint. China's Foreign Exchange Trading System (CFETS) said Thursday the new midpoint pricing system has achieved its anticipated result and will be more market-oriented in the future, Reuters reported.
Fears of mounting global uncertainty and slowing economic growth worldwide could compel the Federal Open Market Committee (FOMC) to delay its next rate hike beyond March, when the U.S. central bank could raise rates for the first time since its historic move on December 16. On Wednesday, minutes from the December FOMC meeting showed that several participants expressed concern that it may be tightening too quickly, amid stubbornly low inflation.
In addition, Chicago Federal Reserve president Charles Evans said Thursday that the Fed should take a cautious path in raising rates by approving two rate hikes in 2016, while accounting for lower economic growth on a long-term basis. Any subsequent rate hikes are viewed as bullish for the dollar, as foreign investors pile into the greenback to capitalize on higher yields.
The spread between U.S. and German government bond widened on Thursday, as yields on the U.S. 10-Year fell two basis points to 2.15%. Yields on German 10-Year bunds, meanwhile, rose four basis points to 0.54%. The yield on German 10-year bunds are up considerably from their all-time low of 0.07% last April.
The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, fell more than 1% to an intraday low of 98.24, before settling at 98.32. The index still remains near 12-month highs from December when it eclipsed 100.00.