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Friday September 11, 2009 - 11:04:39 GMT
Reuters - www.reuters.com

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FOREX NEWS-Dollar hits 1-yr low, biggest weekly fall since May

Fri Sep 11, 2009 6:40am EDT

* Dollar index at 1-year low, euro at 2009 high

* Dlr diversification, long-term status under spotlight

* China data boost economic recovery hopes

(Updates prices, adds quotes and comment)

By Jamie McGeever

LONDON, Sept 11 (Reuters) - The dollar fell to a one-year low against a basket of currencies on Friday, as continued concern over its long-term value further soured the near-term technical picture and meant there was no let-up in the selling.

The dollar index was well on track for its steepest weekly decline in almost four months, and the euro its biggest weekly gain in the same timeframe as it hit a 2009 high of $1.4627.

Generally strengthening Chinese economic data also fueled hopes of global economic recovery, which tempted investors away from the dollar and into riskier, growth-linked currencies.

A U.S. Treasury official on Friday said it makes sense for China to diversify its huge stockpile of foreign exchange reserves, which on the margins fed the bearish dollar sentiment that's firmly taken hold this week.

"It's not helpful for the dollar, but he links it to the idea of new reserve currencies coming into being which as we know will take a long time," said Paul Mackel, currency strategist at HSBC in London.

David Dollar, the U.S. Treasury's economic and financial emissary to China, said that further diversification of China's FX reserves and internationalization of the yuan made sense.

"The general issue is that China has a huge amount of reserves and it makes some sense to diversify what you put these reserves (into)," Dollar told a meeting of the World Economic Forum in the northeast Chinese city of Dalian.

"It's healthy to have a wide and different type of reserve currencies," he said.

At 1020 GMT the dollar index, a gauge of the greenback's performance against six other major currencies, was down a quarter percent on the day at 76.63 .DXY, having earlier traded down at 76.511, its lowest since September 2008.

The euro was up 0.2 percent on the day at $1.4600 EUR=, and up 2 percent on the week. The dollar was down 0.9 percent on the day against the yen at 90.90 yen JPY=, having hit a seven-month low earlier of 90.69 yen, according to Reuters data.

RESERVES IN FOCUS

The diversification issue doesn't appear to have affected demand for U.S. government debt. Three auctions this week worth $70 billion went well and alleviated some fears that the appetite for U.S. government debt may be dwindling in the face of the massive doses of supply. [US/]

That's because central banks that keep their currencies closely tied to the dollar need to buy the greenback in order to keep these pegs steady. And in times of broad dollar weakness, they need to buy more.

Alexei Ulyukayev, deputy chairman of the Russian central bank, told Reuters on Friday the bank would like to diversify the basket of currencies of its near $400 billion reserves by adding two to three more currencies, but declined to specify.

"There's discussion about diversification, Fed credibility, and the re-emergence of the U.S. current account deficit," said Michael Klawitter, senior strategist at Commerzbank in Frankfurt, noting data on Thursday that showed the U.S. trade deficit widened in July.

"All these factors weigh on dollar sentiment, and from a technical point of view the market wants to see at least a test of the December 2008 high in the euro at $1.4720," he said.

Central banks' pledge to keep the world flooded with as much liquidity -- ie, dollars -- as needed to ensure a sustainable economic recovery has raised concern over the currency's long-term value and status as the world's sole reserve currency.

Improving economic data around the world, the abundance of liquidity, and rock-bottom U.S. short term money market rates have all tempted investors to sell dollars for other currencies and assets like stocks and gold.

Data from Asia on Friday showed that China's industrial output expanded in August at the fastest rate in 12 months, slightly topping forecasts and showing that it was well on the road to recovery, although exports and imports fell. ECONCN

The market showed little reaction to data showing Japan's economy grew a revised 0.6 percent in the three months to June, less than preliminary figures had shown but confirming that the economy has crawled out of recession after a full year of sharp contraction.[ID:nT287585]

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