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FOREX-Profit-taking, China comments pushes the dollar lower
Mon Dec 12, 2005 9:57 AM GMT
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(Releads, changes dateline and byline) By Sabyasachi Mitra
LONDON, Dec 12 (Reuters) - The dollar lost more half a percent against the euro in early European trade on Monday as investors trimmed holdings of greenback ahead of a Federal Reserve key monetary policy meeting this week.
Comments from an adviser to the Chinese central bank that Beijing is dangerously exposed to the dollar and needs to work with other East Asian economies to slow rate of accumulation also dragged the greenback lower.
Yu Yongding told Market News International that China must reduce accumulating dollar and cut its holdings.
The dollar fell on those comments and triggered automatic stop loss orders around $1.1840, traders said.
"There is some dollar softening this morning as some people are getting jittery ahead of the Fed meeting. It's all positioning as some investors feel the Fed may change its language," said Brussels-based Peter Fontaine, currency strategist at KBC.
"But I don't think they will rock the boat," he added.
By 0928 GMT, the euro gained 0.6 percent at $1.880 and was up about 0.5 percent against the yen at 143.16.
Earlier in the session, the euro hit a record high versus the yen at 143.27 yen.
The market expects the Federal Reserve to raise its key rate for a 13th straight time to 4.25 percent at a policy meeting on Tuesday, but markets are speculating that the central bank will tweak its language and provide clues on the pace of future rate hikes.
The rise in U.S. rates has been the main driver of the dollar's rally this year.
"Investors are just getting (worried) about what the Fed might say. But I think the dollar losses should be limited," said Mitul Kotecha, head of forex research at Calyon.
Some analysts say Fed might soften its language on the prospects for further rises, and see Tuesday's meeting as a bridge to an inevitable end of the 18-month tightening cycle.
"Although there is a risk that the Fed will move away from references to"measured" pace of tightening, we expect this will not occur until January when (Ben) Bernanke is at the helm," said Monica Fan, global head of FX strategy at RBC Capital Markets.
YEN UNDER PRESSURE
Weighing on the yen were expectations for more selling by Japanese investors, namely individual investors putting winter bonuses to work in high yielders such as the Australian dollar.
Traders said that individual investors have been aggressive buyers of foreign bonds and of mutual funds that invest in other currencies.
"Because of this, other currencies will continue to gain," said Mitsuru Sahara, senior vice president of forex at UFJ Bank.
"At the same time, investors aren't too crazy about buying against the yen at the high levels we've been seeing, which is why we're seeing some range trading."
The outlook for the yen was also rocked by expectations that Japanese mutual funds would sell the yen this week, some traders said.
With Japan's interest rates expected to stay near zero well into next year and perhaps until 2007, Japanese investors have stepped up buying of foreign bonds in recent months.
Japan's capital flows data showed on Monday that Japanese institutional investors bought 433.2 billion yen ($3.58 billion) of foreign bonds in November after a whopping net purchase of over 3.5 trillion yen in October.
"As the Japanese economy recovers, investors' risk appetite is increasing," said Tohru Sasaki, chief forex strategist at JPMorgan Chase Bank in Tokyo, noting that at least 10 foreign bond issues are expected in Japan in coming weeks.
In the near-term, the yen could also be sold as foreign investors who had bought Japanese stocks convert the yen they are starting to receive as interim dividends, Sasaki added.
Sterling hit a seven-year high around 212.75 yen while the Australian dollar edged back towards the 8-1/2-year high around 91.30 yen hit last week.
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