Your Economy (No Politics)

[Bullwinkle]

Dollar stumbles on China reserves comments
By Lucia Mutikani
Tue Mar 20, 2007 3:19 PM BST


NEW YORK (Reuters) - The dollar fell sharply against the yen on Tuesday, erasing earlier gains, after a magazine reported that China would stop stockpiling foreign exchange reserves.

The Emerging Markets magazine quoted Chinese central bank Governor Zhou Xiaochuan 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," Zhou was quoted as saying in the magazine, which was released at a meeting of the Inter-American Development Bank in Guatemala.

China's reserves, which amount to more than $1 trillion, are already the world's largest and have been growing at a brisk pace as China buys foreign currencies to keep the value of the yuan from appreciating beyond a tight trading band.

The bulk of China's reserves are held in U.S. dollars.

"This is very bad news for the dollar. The U.S. has a current account deficit to finance," said Axel Merk, portfolio manager at Merk Hard Currency Fund in Palo Alto, California.

The dollar dipped as low as 117.06 and was trading down 0.16 percent on the day around 117.34 yen,. It earlier rose to 118.01 in overseas trade. The euro fell 0.28 percent to 155.90 yen after climbing to 156.96 earlier.

Merk pointed out foreigners need to accumulate "over $3 billion in U.S. dollar-denominated assets every single business day, just to keep the dollar from falling."

But other analysts said there was nothing new in Zhou's comments and that investors had overreacted.

"This isn't really new. They've been saying they won't change their current currency holdings. What they're saying now is they are not going to add to reserves," said Matt Kassel, director of foreign exchange at ING Capital Markets in New York.

Analysts noted that China would still be accumulating reserves in a new investment agency which is expected to manage some $200 billion of assets.

Traders said the greenback was already paring gains versus the yen, in what some attributed to position-squaring ahead of the Federal Reserve's decision on interest rates on Wednesday.

The market showed little reaction to data showing U.S. housing starts in February came in well above expectations, which was somewhat offset by a downward revision to the previous month's data.

The policy-setting Federal Open Market Committee (FOMC) started its two-day meeting on Tuesday and is expected to leave the fed funds rate unchanged at 5.25 percent.

But the statement accompanying the decision would be scrutinized for clues on the short-term course of monetary policy.

The dollar and other high yielding currencies benefited against the yen on Monday as the recovery in global stocks revived investors' appetite for risky assets, bringing carry trades back into vogue.

Investors will be watching to see if the FOMC says anything about recent global equity turmoil or modifies its current bias toward tightening monetary policy further.

Any shift in market sentiment toward a possible earlier rate cut may hurt the dollar's yield advantage.

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