China Warns on holding U.S. Assets

Reuters
June 7, 2011

The dollar fell to a one-month low against a basket of currencies on Tuesday and a record low against the Swiss franc after a Chinese official said the greenback would continue to weaken versus other major currencies.

The head of the international payment department at the Chinese forex regulator also warned about the risks of excessive holdings of U.S. dollars.

The dollar index [.DXY  73.59    -0.36  (-0.49%)   ]fell to a low of 73.601, the lowest since May 5, while the greenback fell to 0.8328 Swiss francs on trading platform EBS a record low.

“China has been growing its share of U.S. securities quite aggressively in the past, and the threat that they will be  selling these holdings has always been there,” said Adam Myers, senior forex strategist at Credit Agricole.

“But this is not a credible threat as a sell-off will lead  to a steepening of the U.S. yield curve which will hurt the U.S. and the Chinese, who are dependent on the U.S. economy. But I do agree that the dollar is headed lower in the long term.”

The euro rose to its highest in a month, climbing to $1.4666 on EBS, up nearly 0.6 percent on the day. Traders cited option barriers at $1.47 which could check gains in the near
term.

The common currency had got a boost in early European trade after a senior government official said the Greek government expects parliament to vote on its medium-term austerity plan by the end of June, a move which will fulfil a condition to receive new international funding.

The euro has gained more than 4 percent from its May 23 trough. The immediate target for the common currency is $1.4732, a 78.6 percent retracement of its May 4 to May 23 fall.

A break of that level should take it back to the May 4 high around $1.4939, though many traders think the currency will need a signal from European Central Bank chief Jean-Claude Trichet this week that the institution is ready to raise rates in July.

Earlier in the session, the euro slipped after Eurogroup chairman Jean-Claude Juncker said the common currency was overvalued.

“Euro is still clear of crisis levels, but flows are very choppy and investors are awaiting a solution from the IMF, EU, ECB, the private bond-holders and Greece,” said Lena Komileva,
head of G-10 currency strategy at Brown Brothers Harriman.

“It is more of a momentum lift for the euro than anything fundamental.”

With market views mixed on the euro, implied volatilities on euro/dollar options have eased as few market players see the need to hedge against sharp moves in the pair. One-month
euro/dollar volatility slipped to around 11.40 percent, near its lowest in a month.

Bernanke in Focus

While the euro hit one-month highs, worries about a faltering U.S. economy have boosted market expectations for the Federal Reserve to keep interest rates lower for longer, making
the dollar an attractive funding currency.

A fall in U.S. shares to 2-1/2 month troughs is fanning expectations that the Fed is eager to keep rates low for a protracted period, with some market players even talking about
the possibility of QE3 after the current asset buying programme, dubbed QE2, is completed at the end of this month.

Fed Chairman Ben Bernanke will be speaking on the U.S. economic outlook at 3:45 p.m. in Atlanta (1945 GMT) on Tuesday, his first appearance after Friday’s U.S. job data that cemented the view that the U.S. economy has hit a soft patch.

Against the yen, the dollar crept up to 80.22 yen, after a brief dip below 80.00 on Monday for the first time since May 5, helped by bids from Japanese importers.

Meanwhile, the Australian dollar fell 0.2 percent to $1.0687, moving further away from Friday’s four-week high of $1.0775 after the Reserve Bank of Australia kept rates on hold
and gave no hints of tightening in the immediate future.

Its statement surprised some market players by omitting a warning that policy would likely have to tighten in coming months to contain inflation, leading markets to trim the risk of
a move in July or August.