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Thursday May 25, 2006 - 10:28:33 GMT
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FOREX-Dollar falls amid risk aversion, China bank comments

FOREX-Dollar falls amid risk aversion, China bank comments
Thu May 25, 2006 6:18 AM ET

(updates prices, changes byline)

By Veronica Brown

LONDON, May 25 (Reuters) - The dollar fell broadly on Thursday, with growing risk aversion supporting safe-haven currencies while a call for China to rein in property lending created further drag on the greenback.

The euro was also supported by news that Russia has decided to invest 45 percent of its $71.5 billion stabilisation fund in euros.

Trading volumes were expected to remain relatively light as much of Europe is closed for Ascension Day holidays.

The dollar had been bolstered in the previous session by upbeat U.S. April housing data that tilted expectations towards the Federal Reserve raising rates in June. But April durable goods orders, also published on Wednesday, were below forecast.

China's chief bank regulator Liu Mingkang said in comments carried by the China Banking Regulatory Commission on its Web site (, that lending curbs were needed to reduce macro economic risks and for the health of the banking sector.

Analysts said the comments were a possible precursor to China raising interest rates.

"The financial market doesn't work very well in China so they often have to do administrative measures like warning banks not to lend too much," Tony Norfield, head of foreign exchange research at ABN AMRO, said.

"There's every reason why there should be an interest rate hike in China. It may not crimp growth too much, but should help reduce the attractiveness of the dollar," he added.

By 0947 GMT, the dollar was down almost 0.4 percent on the day against the yen at 112.51 , off Wednesday's two-week high of 112.97.

Against the Swiss franc, it was down around 0.2 percent at 1.2156 francs , whilst the euro was a quarter perent stronger at $1.2781

Given the uncertain outlook for interest rates in the world's biggest economy, markets have been increasingly volatile in recent weeks. The dollar has also benefited sporadically from moves in emerging markets, stocks and commodities.

"The main thing ... not just in the currency markets, but everywhere, is risk aversion," said Marios Maratheftis, currency strategist at Standard Chartered.

"The market is looking for safe havens in this environment. It's quite good for the dollar, but it's very good for the euro and also very good for the Swiss franc."


The euro was also supported by news that Russia has decided to invest 45 percent of its $71.5 billion stabilisation fund in the single currency, with another 45 percent going into dollars and the remaining 10 percent into sterling.

"Authorities throughout the world will be looking to diversify their reserves, their funds. I believe this is happening in Asia, it's happening in the Middle East. It provides support for the euro," said Maratheftis at Standard Chartered.

Last month, Sweden said it had increased its euro holdings to 50 percent. Other central banks have also said they are looking to diversify their reserves.


The euro zone data calendar was light. Italian business confidence unexpectedly rose to 96.8 in May, its highest level since December 2000.

The revised U.S. first quarter GDP is due at 1230 GMT with investors expecting the annual rate to be upped to 5.7 percent from the previously announced 4.8 percent.

"The focus is on U.S. Q1 GDP -- analysts are forecasting an upward revision ... and that could cause volatility," said Kris Bernie, markets economist at National Australia Bank. Signs of a strong economy could fuel expectations that the Fed will hike rates for the 17th time to 5.25 percent in June.

The biggest mover among the majors was the New Zealand dollar , which at one point gained more than one percent against the U.S. currency after New Zealand unexpectedly posted a trade surplus in April.

© Reuters 2006. All Rights Reserved


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