The dollar recuperated some of its losses against most major counterparts on Tuesday, with the Japanese yen stabilizing near its 7-month peak against the U.S. currency. This came after a period of significant moves reversed somewhat, bringing a sense of calm back to the markets.

 

The dollar was last up 0.39% at 144.73 yen, following a decline against the Japanese currency over five consecutive sessions. The greenback has decreased about 6% against the yen over the past five trading days.

 

Equity markets also experienced a reassessment, with Japan's Nikkei benchmark index gaining 10% on Tuesday after a 12% drop the previous day. European shares also attempted to recover.

 

"It seems that some of the recent market moves were exaggerated," said Karl Schamotta, chief market strategist at Corpay.

 

"We are witnessing a decrease in safe-haven demand and a return to normal trading patterns across most major currencies," he noted.

 

The yen's recent strength was driven by increased volatility, causing investors to unwind popular carry trades, a trend exacerbated by the Bank of Japan's interest rate hike on Friday.

 

Carry trades, which involve borrowing in low-interest-rate economies like Japan or Switzerland to invest in higher-yielding assets elsewhere, depend on low volatility.

 

"This situation was poised to explode, considering the extreme positioning we’ve seen for some time," Schamotta explained.

 

"However, it appears the bulk of the carry trade unwinding has occurred. The recent significant market movements were likely enough to push out the most highly leveraged players," he added.

 

The Swiss franc remained relatively unchanged against the dollar after rising about 4% since July 29.

 

Similar to the yen, the Swiss franc—a preferred funding currency for carry trades—gained sharply since mid-July as those trades were unwound, bolstered by safe-haven inflows on Monday.

 

The combination of the carry trade unwind, softer-than-expected U.S. job data on Friday, and disappointing earnings from major tech firms triggered a global equity sell-off, further supporting the unwind.

 

On Tuesday, the dollar also regained ground against the euro and the pound, with the euro down 0.2% at $1.093 after reaching a seven-month high of $1.1009 during Monday’s turmoil.

 

Sterling fell 0.67% to $1.2688, affected by the Bank of England’s rate cut last week, which eroded one of its earlier strengths for the year.

 

Currency market movements are also influenced by traders attempting to anticipate U.S. Federal Reserve policy in upcoming meetings.

 

Traders now expect 110 basis points (bps) of easing from the Fed this year, with around a 76% chance of a 50 bps cut in September, down from 85% on Monday, according to the CME FedWatch tool.

 

U.S. central bank policymakers indicated on Monday that weaker-than-expected July job data doesn't denote a recessionary freefall for the economy, but also warned that the Fed would need to cut rates to prevent such an outcome.

 

The Australian dollar was last up 0.42% at $0.6521, following comments from Reserve Bank of Australia Governor Michele Bullock, who indicated that rate cuts were not imminent.

 

Australia’s central bank, as expected, held interest rates steady on Tuesday, while reiterating that no options are ruled out in its efforts to control inflation.