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FOREX-Dollar selling pauses as investors focus on Chinese rates
October 23, 2013 / 1:56 PM / 4 years ago

FOREX-Dollar selling pauses as investors focus on Chinese rates

* Dollar takes a breather; Chinese money market rates weigh
    * Soft U.S. jobs data cements view Fed stimulus to stay

    By Gertrude Chavez-Dreyfuss
    NEW YORK, Oct 23 (Reuters) - The dollar edged up from near
two-year lows against the euro and an 8-1/2-month trough versus
a major currency basket on Wednesday, as investors sought the
greenback's safety following a spike in China's short-term money
market interest rates.
    Concerns about soft U.S. jobs data for September, which
appeared to rule out a cut in U.S monetary stimulus before next
year and caused a plunge in the dollar, took a back seat for
now, as Chinese money market rates climbed to levels not seen
since July. The People's Bank of China failed for a second day
to inject cash. 
    Rising liquidity needs for Chinese corporate tax payment
deadlines and worries about bad banking debt seemed to partly
responsible for the the jump in short-term rates, analysts said.
    The rate spike was short-lived but caused a market panic
nevertheless, causing a scramble for safe-haven dollars and yen.
    "The weight of a weak U.S. non-farm (payroll data released
on Tuesday) is surpassed by rising risk aversion on concerns
over China's money market. Profit-taking takes hold," said
Camilla Sutton, chief currency strategist, at Scotiabank in
Toronto. 
     In early New York trading, the euro was down 0.1 percent at
$1.3768. On Tuesday, the euro hit $1.3792, which was its
strongest level since mid-November 2011
    The yen was also in demand, pushing the dollar down 0.7
percent at 97.40 yen and the euro 0.9 percent weaker at
134.09 yen.  
    Against a basket of widely traded currencies, the dollar
index was up 0.1 percent at 79.281. It fell as low as
79.137, its weakest since early February.
    Still the outlook for the dollar remained downbeat.
Tuesday's U.S. jobs report has pushed out expectations for a
reduction in the Fed's asset-buying plan well into 2014,
Scotiabank's Sutton said. That left the Fed's balance sheet
expanding rapidly while that of other central banks are
stabilizing or contracting.
    A majority of U.S. primary dealers polled by Reuters now
believe the Federal Reserve will not start cutting its $85
billion of monthly bond purchases until March. 
    Strategists pointed to the Fed's Oct. 29-30 policy meeting,
which could indicate whether there has been any substantial
change to Fed policymakers' views on the economy.
    
    EURO STRENGTH WORRIES
    Strategists said if the euro's ascent gathered pace the
European Central Bank could adopt some form of verbal
intervention or other measures to dampen its strength. 
    "Euro/dollar is trading at new highs for the year and the
question is what will the response be from the ECB?" said Chris
Turner, head of FX strategy at ING in a note to clients.  
    "Euro zone headline inflation is low, and the ECB could
repeat its February stance that the strong euro increases
downside risks to inflation."
    He added that the ECB could hint at the need for more
monetary stimulus via new Long-Term Refinancing Operations
(LTRO) as it acknowledges that a "decline in excess liquidity
could be pushing up money market rates."
    "Investors seem happy to play the weak dollar trend against
the euro. $1.3710/30 looks a buy for a multi-day move to
$1.3950/40."

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