Dollar index sinks to 1-month low after China warning
Investors stepped up dollar selling after a senior official at the Chinese forex regulator warned about the risks of excessive dollar holdings, saying Washington could pursue a policy to weaken the greenback.
The dollar index fell to a low of 73.556, the lowest since May 5, while the greenback fell to 0.8327 Swiss francs on trading platform EBS -- a record low. It has lost nearly 11 percent against the Swiss franc this year.
The index's fall past support at 73.562, the 76.4 percent retracement of the May 4 low of 72.696 to the May 23 high of 76.366, potentially paves the way for a break below 73.00. A drop beneath 72.696 would send the greenback to levels not seen since 2008.
"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.
Worries about a faltering US economy, fuelled by much weaker than expected non-farm payrolls data last Friday, have boosted market expectations for the Federal Reserve to keep interest rates lower for longer.
Some market players are even talking about the possibility of QE3 after the current asset buying programme, dubbed QE2, finishes at the end of this month.
"This dollar weakness is a continuation of a trend that has been in place for a while. What will define the extent of dollar depreciation in the second half of 2011 will be expectations and confidence once QE2 is complete," Childe-Freeman said.
Fed Chairman Ben Bernanke will be speaking on the US economic outlook at 3:45 p.m. in Atlanta (1945 GMT) on Tuesday, his first appearance after last week's jobs data that cemented the view that the US economy has hit a soft patch.
In May the dollar set a low last seen in January 1973 according to the Federal Reserve's price-adjusted broad index. Against the yen, the dollar crept up to 80.22 yen, after a brief dip below 80.00 on Monday for the first time since May 5, helped by bids from Japanese importers.
EURO STRENGTH
The euro rose to its highest in a month, climbing to $1.4683 on EBS, more than 0.7 percent on the day. Traders cited option barriers at $1.47 which could check near-term gains. The common currency got a boost in early European trade after a senior government official said the Greek government expects parliament to vote on its medium-term austerity plan by the end of June, a move which will fulfil a condition to receive 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 think the currency will need a signal from European Central Bank chief Jean-Claude Trichet this week that the institution is ready to raise rates in July. "The euro still has downside headline risks but the market's focus has this week switched towards rates," said Chris Walker, currency strategist at UBS. "It's widely expected Trichet will offer the word vigilance and pre-empt a rate hike in July."
With market views mixed on the euro, implied volatilities on euro/dollar options have eased as few market players see the need to hedge against sharp moves in the pair. One-month euro/dollar volatility slipped to around 11.15 percent, near its lowest in a month.
Meanwhile, the Australian dollar was down marginally at $1.0711, 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.
The New Zealand dollar climbed more than 1 percent against the greenback to as high as $82.32 as investors sold the Australian dollar against the New Zealand counterpart ahead of a central bank rate decision on Thursday.
Copyright Reuters, 2011