Reuters: US Dollar Report: FOREX-Euro, Aussie slip as Fed disappointment outweighs China surprise

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FOREX-Euro, Aussie slip as Fed disappointment outweighs China surprise Jun 8th 2012, 03:32 Thu Jun 7, 2012 11:32pm EDT * Fed chief offers nothing new on immediate monetary stimulus * Lack of clear hint of stimulus hurt risk assets * China rate cut spurs talk of weak Chinese data By Hideyuki Sano TOKYO, June 8 (Reuters) - The euro and commodity currencies dropped on Friday, having seen gains sparked by a surprise Chinese interest rate cut quickly evaporate after the U.S. central bank offered no hint of imminent monetary stimulus. Hedge funds were selling these currencies, with traders also citing talk that Chinese economic data due at weekend could be weak and that Beijing's easing might have been aimed at pre-empting the grim news. The euro fell 0.25 percent to $1.2526, retreating from a two-week high of $1.2626 hit on Thursday in the wake of Chinese rate cut, while the Australian dollar slid 0.35 percent to $0.9856. That saw the dollar bounce off a two-week low against a basket of major currencies. The dollar index was at 82.45, well off Thursday's trough of 81.911. The dramatic turnaround came after Federal Reserve Chairman Ben Bernanke struck a decidedly different tone from his deputy, who just hours before his congressional testimony, argued in favor of monetary support. Bernanke told Congress the Fed was closely monitoring "significant risks" to the U.S. recovery from Europe's debt crisis, disappointing those looking for him to lay out the groundwork for a third round of large-scale Fed bond buying. "Some people had high expectations on Bernanke, which he didn't match. The shock would have been much larger if it had not been for the Chinese rate cut," said Ayako Sera, market economist at Sumitomo Mitsui Trust Bank. His comments overwhelmed a surprise move by China, which cut borrowing costs by 25 basis points and gave banks additional flexibility to set competitive lending and deposit rates to combat faltering growth. Traders, however, warned the rate cut could be a pre-emptive move to soothe markets ahead of the release of a batch of key Chinese data on Saturday, including inflation, retail sales and industrial production. Giving more credence to such talk, Shanghai shares eased to two-month lows on Friday despite the easing, undermining the Aussie and other risk-sensitive currencies. TRADING ON CORRELATIONS Also weighing on sentiment somewhat, the Fed released a proposal that largely rejected pleas by the U.S. banking industry to soften parts of an international agreement on higher capital standards known as Basel III, some traders said. As market players sell the euro/yen and the Aussie/yen as proxy for risk in the currency market, the yen also firmed against the dollar. The U.S. dollar dropped 0.2 percent to 79.47 yen, after hitting a two-week peak of 79.798 on Thursday. The euro slipped 0.5 percent to 99.56 yen after brief foray above 100 yen, where selling from Japanese exporters are expected. "The euro/yen and the Aussie/yen have strong correlation with stocks. I think people will just trade on that sort of correlations until we get a clearer picture on Greece," said Makoto Noji, senior strategist at SMBC Nikko Securities, referring to the country's election on June 17. While central bank events hogged the headlines in the past 24 hours, the euro zone debt crisis continued to simmer in the background with Spain's banking problems remaining the biggest headache. German Chancellor Angela Merkel said Europe was ready to act to ensure stability in the euro zone as Spain's credit rating was cut three notches by Fitch amid expectations it may soon seek EU help for banks beset by bad debts. "I do think Europe will take some actions. Merkel is saying she is ready to act, which is a good sign. But right now, we don't have any concrete plan," said Sera at Sumitomo Mitsui Trust. One bright spot was that Madrid managed to raise more than 2 billion euros at a bond auction, albeit at a high price, soothing fears that it is being cut off from financial markets. Link this Share this Digg this Email Reprints

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