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Wednesday June 3, 2009 - 11:42:12 GMT
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FOREX NEWS-Asian comments lift dollar from 2009 lows vs euro

Wed Jun 3, 2009 7:10am EDT

* Dollar climbs on Asia comments on FX reserves

* Euro/dollar, cable reverse climb to 2009 highs

* Asian countries seen continuing to buy U.S. Treasuries

(Releads, adds comment, details, updates throughout)

By Naomi Tajitsu

LONDON, June 3 (Reuters) - The dollar on Wednesday rebounded from its lowest levels this year against the euro after Asian monetary sources said they would keep buying U.S. Treasuries even if the U.S. credit rating were to be downgraded.

The remarks by sources from China, Japan, India and South Korea [ID:nSP412010], which were compiled by Reuters rather than being a joint statement, helped to stem recent selling that has driven the dollar's trade-weighted index .DXY to its lowest this year and down more than 7 percent since the start of May.

Traders viewed the comments as an expression of support for dollar-denominated assets from the nations which control about half of the world's currency reserves. Dollar weakness would erode the value of U.S. investments.

"It is highly rational that you would have comments like these from the main reserve holders in Asia -- they are the people with a natural interest in providing supportive comments for the dollar," said Simon Derrick, head of currency research at Bank of New York Mellon in London.

"It is in their interests for the dollar to restabilise or strengthen ... They are sending a strong signal to the market that they are not going to dump dollars."

The euro pulled away from a five-month high it had hit in early trade, and selling accelerated after the Reuters story was published. Sterling retreated from a seven-month high versus the U.S. currency.

By 1056 GMT, the euro traded 0.4 percent lower at $1.4247, after hitting a session low $1.4179 and falling from $1.4337 hit in early trade, its strongest since December. A 1.0 percent fall in European shares .FTEU3 also helped to push the euro lower.

The dollar index, which tracks the currency's moves against a basket of six currencies, rose as much as around half a percent after the comments, keeping just above its lowest level of the year hit on Tuesday.

Some of the dollar's slide in past weeks has been attributed to speculation that the U.S. credit rating may be downgraded, a move which may prompt nations to diversify their foreign reserves away from U.S. Treasuries.

The comments by the Asian monetary sources came after a visit by U.S. Treasury Secretary Timothy Geithner to China, the world's biggest holder of Treasuries, during which he assured Beijing its U.S. investments were safe because Washington is committed to a strong dollar policy.

Analysts said that the dollar-positive comments had prompted traders to lock in profits against the suffering U.S. currency, and that it might help to stem its recent selling for the time being but was unlikely to change the trend.

"The market is becoming somewhat stretched on short dollar positions as there has been decent sized buying in euro and sterling, so traders were looking for a reason to calm things down," said Geoffrey Yu, currency strategist at UBS in London.

Sterling <GBP=D4> fell as low as $1.6515 after the report, tumbling from $1.6664 hit in early European trade for the first time since October.


Economists say the possibility of a U.S. credit rating downgrade is highly unlikely, but none of the Asian officials dismissed such a possibility, while adding that such a move would have limited impact on their reserve management policy.

Analysts said that the comments were significant, given that the come as a handful of countries around the world have questioned the dollar's role as the world's reserve currency.

"This is significant. It looks like a definite effort to try and shore up the dollar ... and is a contrast to the kind of noise made by Russia yesterday about a new supra-national currency," said Daragh Maher, senior currency strategist at Calyon in London.

On Tuesday, Russian President Dmitry Medvedev said the world's biggest emerging markets may discuss the idea of a supranational currency given a changing perception of the U.S. dollar due to weakness in the country's economy.

Investors offered limited reaction to a final reading of euro zone GDP, which showed that the economy shrank 4.8 percent in the first quarter, its worse ever contraction. [ID:nL3159042].

They also brushed off a reading of services PMI in the region, which was revised up to a seven-month high of 44.8 in April from an initial reading of 43.8. Forecasts had been for 44.7 [ID:nLAG003476].

Given focus on whether global investors will continue to flock to U.S. Treasuries, investors awaited testimony from U.S. Federal Reserve Chairman Ben Bernanke, who will speak before the House of Representatives Budget Committee at 1400 GMT.

The market is waiting for clues on whether the Fed will increase or speed up purchases of longer-dated Treasuries to keep down interest rates.

Traders also awaited figures on the U.S. employment sector later in the day. Challenger, Gray & Christmas Inc. releases its report on job cuts in May at 1130 GMT, while the ADP will release its May employment report at 1215 GMT.

(Additional reporting by Swaha Pattanaik and Jamie McGeever; Editing by Victoria Main)

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