Dollar weighed by China comments; euro hits 1-mo high

By Julie Haviv and Steven C. Johnson

NEW YORK (Reuters) – The dollar slid to a one-month trough against the euro and briefly hit a record low against the Swiss franc Tuesday after a senior Chinese currency regulator repeated warnings about investing too heavily in dollar-denominated assets.

In an article posted on the website of the China Finance 40 Forum, a Beijing-based think tank, Guan Tao said his country must be alert to the risk of holding too many dollars when Washington is pursuing loose monetary and fiscal policies.

Guan’s comments were later removed from the website.

Traders said they added to existing pressure on the dollar and underscored recent moves by China and others to add more euros, yen and other currencies to their dollar-heavy portfolios.

“There was really nothing new in these comments as they echoed what several Chinese officials have been saying over the past year,” said Douglas Borthwick, managing director at Faros Trading in Stamford, Connecticut. “With nothing else happening today it is easy to see how these comments could move the market. Nobody wants to put all their eggs in one basket.”

The yuan has gained 5.33 percent since it was unpegged from the dollar in June 2010, and 1.65 percent since the start of this year.

Borthwick said he expects the yuan to continue to gradually gain against the dollar, with the pace rising to around 8 percent every year for another 4 years.

“Reserve diversification will continue at a steady drip,” he said. “Both the U.S. and China will get very upset if the yuan appreciates too fast and too soon.”

China’s foreign exchange reserves exceed $3 trillion, and economists estimate as much as 70 percent is held in dollars.

The comments from China earlier sent the dollar to a record low of 0.8327 Swiss franc, but the safe-haven Swissie eventually reversed course as investors sought riskier assets. The dollar, which is down about 10 percent against the currency this year, last traded at 0.8376, up 0.4 percent.

The euro hit a one-month high of $1.4692, helped partly by better-than-expected German factory data, before easing to $1.4682, up 0.7 percent. The dollar fell 0.1 percent to 80.14 yen.

The euro also benefited from news that plans for a second bailout of Greece are taking shape, with a proposal for a three-year package worth 80 to 100 billion euros set to be ready in the next two weeks, euro zone official sources said.

As Greece concerns abate, central bank policy has moved back to the forefront. Rate differentials are a primary driver for the euro’s nearly 10 percent gain against the dollar this year.

The Federal Reserve is expected to hold interest rates at zero percent well into 2012. The European Central Bank raised rates in April and is expected to hint at another hike in July when it holds its next policy meeting on Thursday.

Fed Chairman Ben Bernanke will speak on the U.S. outlook at 3:45 p.m. in Atlanta , his first appearance after last week’s disappointing U.S. payrolls report.

Jens Nordvig, global head of G10 FX strategy at Nomura Securities in New York, said at the Reuters 2011 Investment Outlook Summit in New York that he expects the dollar to ”continue its weak trend” if global economic data is modestly weak.

The dollar will benefit from risk aversion only if global data becomes much weaker or “if there is another banking crisis,” he said. (Additional reporting by Gertrude Chavez-Dreyfuss in New York and Nia Williams in London; Editing by Dan Grebler)