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Tuesday March 20, 2007 - 20:46:59 GMT
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FOREX NEWS-Dollar falls, Chinese reserve comments boost yen

FOREX-Dollar falls, Chinese reserve comments boost yen
Tue Mar 20, 2007 4:28pm ET

NEW YORK, March 20 (Reuters) - The dollar fell against the yen on Tuesday after a magazine reported that China would stop stockpiling foreign exchange reserves and slipped against other major currencies as investors remained wary of risky trades.

But analysts said People's Bank of China Governor Zhou Xiaochuan might have been misquoted, since China's $1 trillion stash of reserves will keep growing as long as the central bank buys dollars to prevent the yuan from strengthening, a practice it has shown no sign of abandoning any time soon.
Zhou was quoted by the Emerging Markets magazine, a Euromoney publication, as saying "many people say that foreign exchange reserves in China are (already) large enough. We do not intend to go further and accumulate reserves."

"Most people in the market assumed he was misquoted and the intention wasn't that they were going to stop accumulating reserves, but more that they would stop accumulating reserves in the same way as they are now," said Camilla Sutton, foreign exchange strategist at Scotia Capital in Toronto.
The dollar dipped to a session low of 116.93 yen , and was last trading at 117.22, down nearly 0.3 percent from late Monday. It had touched 118.01 in overseas trade.

The euro was 0.1 percent lower at 156.15 yen after hitting 156.96 earlier. Against the dollar, the euro traded at $1.3315 , up 0.1 percent.


Analysts said there appeared to be nothing new in Zhou's remarks and added that short-term investors simply used them to unwind long dollar trades built up on Monday when global stock markets rebounded and carry trades came back into vogue.

"If he'd said they were going to let the yuan float, that would have been a significant change in China's currency management strategy," said David Watt, senior currency strategist at RBC Capital Markets in Toronto. "But I don't think what he actually said was all that significant."

China's reserves are already the world's largest and have been growing at a brisk pace as China buys foreign currencies -- mainly dollars -- to keep the yuan from rising beyond the top of a tight trading band.

Analysts noted that China would still be accumulating reserves in a new investment agency which is expected to manage some $200 billion of assets and aim at increasing returns by investing in a wider array of financial instruments.

Zhou's comments came at a nervous time for markets, with worries about defaults in the U.S. subprime mortgage market and a general unwinding of risk contributing to choppy trade.

"People are just tightly wound right now and almost anything causes a market reaction," Watt said. "In a period of lower volatility, I don't think Zhou's comments would have had any impact whatsoever."

Indeed, the dollar was lower against most major currencies and emerging market currencies such as the Mexican peso . Sterling rallied broadly after inflation data boosted the case for higher UK interest rates, while the dollar fell 1.4 percent against its Canadian counterpart to $1.1604 , a three-week low.

"Effectively the dollar is losing ground against virtually all assets," analysts at CitiFX Technical wrote in a note to clients on Tuesday. "We think this could be the start of the weak dollar trade reasserting itself."

Investors were looking ahead to the end of a two-day Federal Reserve meeting on Wednesday. The Fed is seen leaving rates steady at 5.25 percent, but any mention of recent equity turmoil or easing inflation could weaken the dollar further.

(Additional reporting by Lucia Mutikani)

© Reuters 2007. All Rights Reserved.


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