FOREX-Chinese rate rise undercuts risk, helps US dollar

* Dollar gains, Aussie tumbles as China raises rates

* U.S. Treasury’s Geithner comments support dollar

* China move sparks risk aversion; dollar still vulnerable
(Recasts, updates prices, adds detail, comment; changes
byline)

By Steven C. Johnson

NEW YORK, Oct 19 (BestGrowthStock) – A surprise interest rate
increase from China on Tuesday rattled currency investors, who
cut exposure to risk by selling the euro and
commodity-sensitive Australian dollar and taking refuge in the
U.S. dollar.

Investors feared a quarter percentage point rise in China’s
one-year lending rate could dampen Chinese and global growth
and slow China’s voracious demand for commodities, many of
which come from Australia. [ID:nBJI002412]

“China’s rate increase instantaneously pushed people to
take risk off the table,” said Boris Schlossberg, director of
research at GFT Forex. “They are trying to clamp down on growth
and that’s going to reflect badly on Australia, on Germany, on
much of the world economy as it readjusts to the idea that
Chinese growth may not be as torrid as expected.”

The Australian dollar, which last week rose above parity
with its U.S. counterpart for the first time since 1983, was
hit hardest, slipping 1.5 percent to $0.9789 (AUD=D4: ).

The euro, yen and sterling also fell sharply, with the euro
down 0.9 percent at $1.3820 (EUR=: ), off a $1.4003 session peak.
The dollar rose 0.6 percent to 81.72 yen (JPY=: ), its best daily
gain since Japan intervened to weaken the yen on Sept. 15.

The dollar hit a 15-year low beneath 81 yen last week, not
far from a 79.75 record low set in 1995.

The U.S. currency also rose 1.7 percent to 1.0350 Canadian
dollars (CAD=: ) after the Bank of Canada left interest rates at
1 percent and cut is growth forecast. [ID:nN19118876]

DOLLAR REBOUND

Hobbled by zero interest rates and expectations of more
Federal Reserve easing to come, the dollar has been under
pressure since September. Analysts, however, say the
expectations of Federal Reserve easing have been priced in,
providing an opportunity for investors to take profits.

China’s move accelerated the dollar rebound, as did a
survey showing German economic sentiment fell in October.
[ID:nWEN1314]

The dollar also got a boost late Monday after Treasury
Secretary Timothy Geithner said the United States would not
devalue the dollar for export advantage. [ID:nLDE69I00W]

Analysts said Geithner’s comments may mean the United
States was trying to ease recent global tensions over exchange
rates ahead of a G20 meeting in November. Washington wants
China to allow more rapid appreciation of the yuan, while
Beijing and others complain that dollar weakness is sending hot
money into their economies and driving up inflation.

But few expect the dollar to stage an extended rally. The
Fed is expected to move as soon as November to pump more money
into an increasingly sluggish U.S. economy, a policy that is
“generally corrosive to the value of a currency,” said BNY
Mellon strategist Michael Woolfolk.

New York Fed President William Dudley said Tuesday that
employment and inflation are likely several years away from
being within the Fed’s comfort zone, comments that traders said
suggests that more easing is nearly certain. [ID:nNLLJLE6KI]

Woolfolk said near-term support for the euro was seen
around 1.3775, the 23.6 percent retracement of a move from
$1.2990 in early September to $1.4157 last week, followed by
$1.3700.

High-yielding commodity currencies such as the Australian
dollar are also likely to attract buyers following their recent
pullback, said Societe General strategist Kit Juckes.

He said the market’s “gut reaction is to sell commodity
block and emerging market currencies” on the China news but
added the news was “not a game changer.”

(Additional reporting by Jessica Mortimer in London)
(Editing by Theodore d’Afflisio)

FOREX-Chinese rate rise undercuts risk, helps US dollar