Chinese comments further erode dollar - US currency at 14-month low against euro

Chinese comments further erode dollar - US currency at 14-month low against euro
By Peter Garnham
Copyright The Financial Times Limited 2009
Published: October 26 2009 10:51 | Last updated: October 26 2009 17:23
http://www.ft.com/cms/s/0/875f4a44-c215-11de-be3a-00144feab49a.html


The dollar dropped to a fresh 14-month low against the euro on Monday after the People’s Bank of China suggested that, while the dollar should remain dominant, the share of the euro and the yen should increase in its foreign exchange reserves.

The exact composition of China’s $2,270bn foreign exchange stockpile, the world’s largest, is a state secret, but it is estimated that it is held 60 per cent in dollars, 30 per cent in euros and the remainder in sterling and yen.

Fears that China would diversify its reserves away from a weakening dollar have been a drag on the US currency in recent months, amid repeated concerns from Chinese authorities over the value of its stockpiles.

The dollar fell to a low of $1.5061 against the euro, its weakest level since August 2008, on the news.

But the dollar pared its losses against the single currency, after the author of the report, which appeared in the Financial News, a paper published by the PBC, said it was purely a “personal view”.

The dollar also received support later in the session as stock markets weakened on reports that the Obama administration was planning a new strategy that would make it easier for the US to seize control of financial institutions and make important changes.

The news sent financial stocks sharply lower, fuelling haven demand for the dollar.

By midday in New York, the dollar was up 0.7 per cent at $1.4888 against the euro, 0.8 per cent higher at SFr1.0165 against the Swiss franc and 0.3 per cent stronger at $0.9179 against the Australian dollar.

However, the dollar eased 0.1 per cent to Y92.00 against the yen as falling equities also boosted haven demand for the Japanese currency.

The pound also managed to advance against the dollar, rising 0.1 per cent to $1.6315. Analysts said sterling’s relatively robust performance reflected profit taking following a sharp fall following a shock drop in UK GDP last week.

Meanwhile, the Canadian dollar dropped to two-week low against the US dollar after the Bank of Canada reiterated a warning over the currency’s recent strength.

The Canadian dollar fell 1.1 per cent to C$1.0637 against the US dollar after Mark Carney, BoC governor, said the strength of the Canadian currency could be a “significant drag” on growth.

The South Korean won advanced against the dollar, rising 0.7 per cent to Won1,178.40 after Korean GDP came in stronger than expected, posting its fastest quarterly expansion in seven years. This heightened expectations that the Bank of Korea would raise interest rates at its policy meeting next month.