Dollar holds firm after surprise China rate hike

By Ian Chua

SYDNEY (BestGrowthStock) – The dollar held firm in early Asian dealings on Wednesday with investors across the region poised to cut short positions a day after a surprise interest rate increase in China spurred the market to lower risk exposure.

Commodity-sensitive currencies were under the most pressure with the Australian dollar

Investors worry the hike of 25 basis points, the first tightening in nearly three years, could mark the start of a more aggressive phase of monetary tightening, dampening Chinese and global growth and denting the country’s voracious demand for commodities.

The dollar bounced off a 15-year trough below 81 yen to as high as 81.92 yen, and was last at 81.41, while the euro slid to a two week low near $1.37. The single currency was last at $1.3718.

The U.S. dollar index (Read more about the global trade. ), which tracks the greenback versus a basket of six currencies (.DXY: ) posted its biggest daily gain since August on Tuesday, and was last trading at 78.302, a touch firmer from the New York close.

“There still are a lot of short dollar positions … so the risk is we do see more unwinding through the Asian time zone. But I wouldn’t read too much more into it than a shake out,” said Richard Grace, chief currency strategist at Commonwealth Bank in Sydney.

Some analysts said the market’s reaction was overblown and with the Federal Reserve set to ease monetary policy further as early as next month, any dollar rebound will be short-lived.

Indeed, a string of U.S. Federal Reserve officials on Tuesday indicated the central bank will soon offer further monetary stimulus to the economy, with one saying $100 billion a month in bond buys may be appropriate.

“What I think will be short-lived is the weakness in Asian and commodity currencies in particular. There is a strong structural theme there and still valid,” said Greg Gibbs, strategist at RBS in Sydney.

“I don’t think the hike in China is too significant in terms of actually slowing down growth there. I wouldn’t view that as a factor to be getting bearish on risk or bearish on Asian growth.”

Traders expect the dollar to struggle to get through 81.92 yen, the overnight high, which also roughly coincides with trendline resistance. Any move down through 80 yen was likely to renew the risk of the Bank of Japan to intervene to weaken the currency again.

“If it went below 80 that would be an intervention risk,” Commonwealth Bank’s Grace said.

On the crosses, the euro fell (Read more about the trembling euro. ) to 111.65 yen from 112.04 yen at the New York close.

The euro was seen supported at around $1.3580, the 38.2 percent retracement of the September to October rally.

(Additional reporting by Wanfeng Zhou in NEW YORK)

Dollar holds firm after surprise China rate hike