Dollar weakens as China woes rattle global markets

The dollar weakened against other major currencies Monday after a Chinese equities meltdown spread into a global market rout on fears about China's faltering economy.

The dollar had made big gains as the Federal Reserve plans its first interest rate hike since 2006 this year, lifting the benchmark federal funds rate off the zero level where it has been parked since the 2008 financial crisis.

But the market carnage Monday emanating from China, where a slowdown in the world's second-largest economy is spooking investors, cooled expectations the Fed will lift rates in September and hammered the dollar.

"America's greenback tumbled to seven-month lows against the euro and yen as worries about global growth all but slammed the door shut to a US rate hike in the weeks and months ahead," said Joe Manimbo, senior market analyst at Western Union Business Solutions.

The dollar ended the day down 2.9 percent against the yen and 1.9 percent against the euro as investors fled to the relative safe-haven currencies amid intense market volatility.

Boris Schlossberg of BK Asset Management noted that typically, the dollar would rise against the euro in times of risk, and then turn around when stocks rally.

But since the European Central Bank began its massive quantitative easing program earlier this year, he said, the euro had become the preeminent carry trade funding currency due to its liquidity and ultra-low costs.

"As several analysts have pointed out, investors have borrowed heavily in euros and used those proceeds for more risky bets in equities. Therefore the massive crash in global indices has caused a huge unwind in the euro carry trade, pushing the single currency higher not only against the dollar but against every major G-10 trading partner," Schlossberg said.

"The conventional wisdom on Wall Street assumed that the euro would decline in H2 (the second half of 2015) as the divergence in monetary policies between the Fed and the ECB would make its way felt," said Schlossberg.

"However the events of the past two weeks have completely upended that thesis."