China warning, uncertain US outlook hit dollar

NEW YORK: The dollar hit a record low against the Swiss franc and fell against other currencies on Tuesday after a senior Chinese currency regulator warned about the risks of investing too heavily in dollar-denominated assets.

In an article posted on the website of the China Finance 40 Forum, a Beijing-based think tank, Guan Tao said his country must be alert to the risk of holding too many dollars at a time when Washington is pursing loose monetary and fiscal policies.

"The United States may find it hard to resist the policy temptation of weakening the dollar abroad and pushing up inflation at home," Guan said.

While Guan's comments did not reflect a new concern and were later removed from the website at his request, traders said they did add to existing pressure on the dollar and underscored recent moves by China and others to add more euros, yen and other currencies to their dollar-heavy portfolios.

"It's a sensitive topic for markets, and it does seem that China has had its fill of dollars," said BNY Mellon strategist Michael Woolfolk. "The move higher in the euro overnight stemmed from those comments."

China's foreign exchange reserves exceed $3 trillion, and economists estimate as much as 70 percent is held in dollars.

Traders said the Chinese comments added to an anti-dollar bias in the market, fed by recent weak US economic data and worries about the country's massive budget deficit.

The dollar hit a record low of 0.8327 Swiss francs and is down nearly 11 percent against the currency this year.

The euro hit a one-month high of $1.4682, helped partly by better-than-expected German factory data, before easing to $1.4673 up 0.6 percent. The dollar fell 0.1 percent to 80.17 yen.

"Since last week attention had been focusing on uncertainty about the US economy. The dollar was already biased towards the downside, and these remarks from the Chinese authorities are just another reason to sell," said Audrey Childe-Freeman, European head of currency strategy at JP Morgan Private Bank.

The Federal Reserve is expected to hold interest rates at zero percent well into 2012, a view that gained credence last week after data showed the US economy added far fewer jobs than expected in May.

Fed Chairman Ben Bernanke will be speaking on the US outlook at 3:45 p.m. in Atlanta (1945 GMT) on Tuesday, his first appearance after last week's employment report.

The European Central Bank raised rates in April and is expected to hint at another hike in July when it holds its next policy meeting on Thursday.

The euro also got a boost after a senior government official said the Greek government expects parliament to vote on a medium-term austerity plan this month, which would meet one of the conditions for receiving new international funding.

The euro has gained more than 4 percent from its May 23 low. The immediate target for the common currency is $1.4732, a 78.6 percent retracement of its May 4 to May 23 fall.

A break of that level should take it back to the May 4 high around $1.4939, though many traders said that will require a hawkish signal from ECB President Jean-Claude Trichet.

The Australian dollar was flat at $1.0708, moving away from Friday's four-week high of $1.0775 after the Reserve Bank of Australia kept rates on hold and gave no hints of tightening in the immediate future.

But the New Zealand dollar climbed nearly 1 percent against the greenback to $0.8212 as investors bought it ahead of a central bank rate decision on Thursday.

Copyright Reuters, 2011