Dollar takes a hit, Euro yen surge as risk aversion intensifies

The euro hit a 6 1/2-month high and the yen struck a 1 1/2-month peak against the dollar on Monday as investors dumped riskier assets and flocked to currencies often seen as safe havens on fears about a slowdown in the Chinese and global economies.

The dollar index, which measures the greenback's performance against a basket of six major currencies <.DXY> fell 0.7 percent to its lowest in two months as investors pushed back expectations of a rate hike by the Federal Reserve in September. The 10-year U.S. Treasury yield fell below 2 percent, diminishing the dollar's allure.

The euro jumped to $1.1499 , its highest level since February. It last stood at $1.1470, up 0.6 percent on the day, with its sustained rise in the past few weeks likely to cause much unease within the European Central Bank.

The dollar slid to 120.73 yen , down more than a full yen from 121.96 late in New York on Friday, reaching a low last seen on July 9. It was last trading at 121 yen, down 0.8 percent in the day.

Asian stocks slumped to 3-year lows as slide in Chinese equities gathered pace while European stock markets all started the day in the red. U.S. stock futures also pointed to deep losses, highlighting the glum sentiment that has overtaken global markets since the Chinese devalued the yuan this month.

"The meltdown in stock markets and the sharp fall in US yields is unambiguously negative for dollar/yen," said Petr Krpata, currency strategist at ING. "As long as the current market environment persists, the chances of dollar/yen breaking below the psychological 120 level are increasing."

The commodity-linked Australian dollar slid to six-year lows and many less-liquid emerging market currencies plunged on worries about foreign capital outflows after Chinese shares tumbled more than 8 percent.

Worries about a slowing Chinese economy, and in turn global growth, engulfed markets after a run on weak economic indicators from China in recent weeks, including Friday's survey showing a further deterioration in China's manufacturing activity.

Traders said while the weakness in the dollar reflected doubts whether the Federal Reserve will be able to hike interest rates next month, without clear signals from the U.S. central bank so far, many commodity and emerging market currencies would continue to struggle.

"In an environment like this, the Fed would usually ease its policy. But so far the Fed hasn't said so, which is amplifying risk for markets," said Tadashi Matsukawa, head of bond investments in Tokyo at PineBridge Investments.