NEW YORK The dollar, yen and Swiss franc all rose on Wednesday after a spike in China's short-term money-market interest rates raised concerns about the world's second-largest economy, driving bids for currencies deemed as safe.
Chinese money-market rates climbed to levels not seen since July after the People's Bank of China failed to inject cash for a second day, as regulators showed signs of concern that loose liquidity might be fuelling another round of risky credit expansion.
The dollar, however, fell sharply against the yen in the aftermath of Tuesday's tepid U.S. jobs data that reinforced expectations that the Federal Reserve will maintain its stimulus efforts in the near term.
"The weight of a weak U.S. nonfarm (payrolls) 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.
The dollar also rose against riskier and commodity-linked currencies such as the Australian and New Zealand dollars. In afternoon New York trading, the Aussie dollar fell 0.8 percent versus the greenback to US$0.9624, while the New Zealand currency dropped 1.4 percent to US$0.8394.
But the Canadian dollar plunged after the Bank of Canada on Wednesday dropped reference to any interest rate increase for the first time since April 2012, citing weak economic growth.
The euro, meanwhile, was little changed against the dollar after the president of the European Central Bank, Mario Draghi, said he wants to put in place a tougher stress test for banks.
The euro last traded flat at $1.3778 after earlier reaching $1.3792, matching Tuesday's high, which was its strongest since mid-November 2011.
The yen was firmly in demand, with the dollar down 0.8 percent at 97.34 yen and the euro 0.8 percent lower at 134.14 yen.
The Swiss franc also rose, as the dollar slipped 0.3 percent to 0.8918 franc and the euro fell 0.3 percent to 1.2294 francs.
The dollar index, which gauges the dollar against a basket of six major currencies, was up 0.1 percent at 79.278. It fell as low as 79.137, its lowest level since early February.
Still, the outlook for the U.S. 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 outlook leaves the Fed's balance sheet expanding rapidly while those 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 said the Fed's next policy meeting, on October 29-30, could give an indication whether policymakers have substantially changed their views on the economy.
Against the Canadian dollar, the greenback surged 0.8 percent to C$1.0374.
Canada's central bank meets eight times a year, and the final meeting for 2013 is set for December 4.
"A dovish statement from the Bank of Canada catches an inattentive market. They increased the time it takes for inflation to return to target and reduced potential growth," said Sebastien Galy, foreign exchange strategist at Societe Generale in New York.
"They still haven't factored in the underlying deflationary pressures in Canada but are clearly worried, adding some emphasis on the risk of a housing correction," he said.
EURO STRENGTH WORRIES
The euro has gained 4.4 percent so far this year against the dollar. It recently hit a two-year peak against a trade-weighted basket.
Strategists said if the euro's ascent gathered pace the ECB could adopt some form of verbal intervention or other measures to dampen its strength. A stronger euro is negative for euro zone exporters.
"The dollar fared mixed as concerns about rising interest rates in China dimmed the spotlight on the sluggish U.S. economy and how the Fed might put off a taper until next year," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington D.C.
"Watch for the spotlight to intensify on the U.S. economy Thursday with key readings due on jobless claims, the trade gap and new home sales," he said.
(Additional reporting by Gertrude Chavez-Dreyfuss in New York and Anooja Debnath in London; Editing by Chizu Nomiyama)