Dollar's rate rise rally fizzles as China fears weigh

The dollar slipped against the yen and euro Monday on fears that China's economic malaise could drag on global growth, reversing a rally that had been fuelled by hopes of a September US rate rise.

In Tokyo afternoon trade, the dollar weakened to 121.10 yen from 121.52 yen late Friday in New York.

The euro rose to $1.1249 and 136.24 yen from $1.1188 and 135.97 yen in US trade.

Speaking at the weekend on the sidelines of the Fed's central banking symposium in Jackson Hole, Federal Reserve vice chairman Stanley Fischer acknowledged that the turmoil rooted in China had raised some questions about the economic situation, even if US data remains good.

"The change in the circumstances which began with the Chinese devaluation (of the yuan) is relatively new and we are still watching how it unfolds. So I wouldn't want to go ahead and decide right now (on a September rise)," he said in a CNBC interview.

"We've got a little over two weeks before we make the decision and we've got time to wait and see the incoming data and see what exactly, what is going on now in the economy."

Fischer's remarks were taken as a sign that the US central bank was still considering a rate rise as early as next month.

Higher rates tend to boost the dollar as investors seek out higher-yielding assets.

But on Monday renewed concerns about China set in as markets look ahead to the release of manufacturing data this week.

Some economists tipped a contraction in activity in August, which would be the first since February, according to Bloomberg News.

"We have no doubt that financial market volatility will have as much or more bearing than economic data volatility on the Fed's 17 September policy decision," National Australia Bank said in a commentary.

"In this respect we have to be mistrustful that the strong resurgence in Chinese stock prices will hold."

Shanghai shares had sank 2.61 percent by the break Monday. The index plunged more than 16 percent from Monday to Wednesday last week before bouncing 10 percent in the next two sessions.

The dollar was mostly stronger against other Asia-Pacific currencies.

It rose to Sg$1.4130 from Sg$1.4027 on Friday, to 46.78 Philippine pesos from 46.64 pesos, and to 1,182.89 South Korean won from 1,175.90 won.

It also gained to Tw$32.55 from Tw$32.28, to 35.89 Thai baht from 35.85 baht and to 66.32 Indian rupees from 66.08 rupees, while it declined to 14,029 Indonesian rupiah from 14,038 rupiah.

The Australian dollar eased to 71.54 US cents from 71.68 cents, while the Chinese yuan fetched 18.99 yen against 18.93 yen.