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Friday November 10, 2006 - 11:58:19 GMT
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FOREX-Dlr falters after China FX reserve diversify talk

FOREX-Dlr falters after China FX reserve diversify talk
Fri Nov 10, 2006 6:49am ET143

(Changes byline, adds quotes updates prices)

By Veronica Brown

LONDON, Nov 10 (Reuters) - The dollar hit new 2-1/2 month lows against the euro and an 18-month low against sterling on Friday after further comments from China's central bank chief that the bank is looking to diversify its trillion dollar currency reserves.

With the bulk of the People's Bank of China's reserves thought to be in dollar-denominated assets, many traders took Zhou Xiaochuan's comments to mean China might buy fewer dollars from future reserve accumulation or trim current dollar holdings.

Zhou's comments on Friday appeared to expand on similar remarks he made the day before and kept the dollar under pressure. But he said there was no change to China's long- standing diversification policy, which helped limit the dollar's downside.

Analysts said the comments gave dollar bears a good excuse to sell, but the rhetoric did not represent a significant departure for the Chinese central bank.

"The (Zhou) comments were a good catalyst to sell the dollar but I really don't think that they add new information. The PBOC have had their policy in place for some time," Barclays Capital currency strategist Adarsh Sinha said.

"The market seems to be reacting with a bit of a lag to some of the reasons we've seen for selling the dollar in the last couple of months," he added.

By 1116 GMT the euro was up 0.3 percent on the day at $1.2876, having hit a peak of $1.2900, its highest since Aug. 21

Sterling was 0.6 percent higher at $1.9164, pulling back a touch from an 18-month peak of $1.9180 .

The dollar was also half a percent weaker at 1.2367 Swiss francs , after touching a six-week low earlier.


Zhou was speaking on the sidelines of a European Central Bank conference in Frankfurt, which several other central bankers are attending, including Federal Reserve Chairman Ben Bernanke.

When asked about what markets China was considering investing its reserves in, Zhou told Reuters: "(Diversification) includes currencies, investment instruments, including emerging markets."

The dollar and other currencies also came under pressure against the yen overnight after Bank of Japan Governor Toshihiko Fukui said he was concerned about a sharp unwinding of carry trades where investors borrow the low-yielding Japanese currency and buy higher yielding currencies.

The ongoing carry trade lifted sterling to an eight-year high and the euro to a record high against the yen on Thursday.

But Fukui's comment on the carry trade and remark in an interview with a Japanese newspaper on Friday that the BOJ would raise rates pre-emptively but in small steps helped support the yen.

The dollar slipped 0.5 percent to 117.36 yen . The euro was flat at 151.18 yen , backing away from the record high of around 151.50 yen hit the previous day.

"(Fukui's) reference to a 'forward-looking manner' in guiding policy has fuelled speculation the BOJ may hike rates before the year is out," currency strategists at RBC Capital Markets said in a note to clients on Friday.

BOJ deputy governor Kazumasa Iwata said in Frankfurt that economic recovery in Japan was likely to be a little above its potential growth rate in this fiscal year ending March 2007, adding that he could not say precisely when the bank might raise rates again from the current 0.25 percent.

Traders will now look to what Fed chief Bernanke and ECB chief Jean-Claude Trichet say when they speak at conference panels later on Friday.

© Reuters 2006. All Rights Reserved.


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