Struggling dollar hovers above record lows

The dollar weakened again yesterday but hovered above record lows against the euro plumbed overnight on comments, later retracted, that China was cutting back on its accumulation of dollar assets.

The dollar slid to a record low of $1.3329 to the euro during overnight trading in Asia after a Chinese business newspaper quoted a member of the country's central bank policymaking committee as saying that China had already begun reducing US dollar assets in its foreign exchange reserves.

"In the state that the market is in right now, where there is a lot of speculation about reserve shifts, the comments from China were taken quite seriously," said Mr Bob Lynch, currency strategist at BNP Paribas in New York.

It was the fourth straight day that the dollar has set a fresh low against the euro.

The dollar bounced back after the banker quoted in the article issued a statement saying he had, in fact, no knowledge of the central bank's action on reserves.

But traders quickly jumped in to sell the dollar on rallies, as has been the pattern in recent weeks. By mid-afternoon in New York, the euro was trading at $1.3292.

The market showed little reaction to comments later yesterday by European Central Bank chief Jean-Claude Trichet, who was in Rio de Janeiro. He said recent moves in the euro/dollar were "unwelcome," and that it underlined the importance of the US Treasury pursuing its strong dollar policy.

"The market was looking for something to change the perceived threat of intervention by the ECB, and he hasn't said anything in that direction," said Mr Lynch.

Dealers said trade was thin and choppy with other US markets closing early after the Thanksgiving holiday. The gaping US current account deficit has been partly financed for a number of years by purchases of Treasuries by foreign central banks. China is the second-biggest holder of US assets after Japan.

So far this year, foreign central banks have bought more than $200 billion of Treasuries and own nearly 30 per cent of publicly held US Treasury debt.

While there has been no evidence in the market of a large shift in Chinese central bank holdings out of dollars and into euros, most analysts expect central banks to diversify out of dollars over time. Even a hint that China might be backing off from Treasuries was enough to roil the market, dealers said.

The dollar hit a 4½-year low of 102.18 yen according to Reuters data, but was trading at 102.50 in the US trading hours, nearly flat on the day. Sterling hit a nine-month high of $1.9040 in Asia, within sight of 12-year highs, and was trading at $1.8964 in New York. - (Reuters)