Nov. 9 (Bloomberg) -- The dollar fell to the lowest against the euro in more than two months after Reuters reported People's Bank of China Governor Zhou Xiaochuan said he has a ``clear'' plan to diversify the country's foreign-exchange reserves.

China's foreign-currency reserves have exceeded $1 trillion to become the most ever held by a single country, China Central Television reported on Nov. 7. U.S. assets may comprise 72 percent of China's reserves, according to Miller Tabak & Co. in New York.

``The market is taking this as a hint that China may speed up its pace of diversification away from the dollar and into other currencies,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut.

The dollar traded at $1.2829 per euro at 5 p.m. in New York from $1.2757 yesterday. The U.S. currency touched $1.2848, the lowest since $1.2875 on Sept. 5. The U.S. currency traded at 117.93 yen from 117.84. The dollar earlier reached 118.59 yen.

The U.S. trade deficit with China rose to an all-time high of $23 billion in September, from $22 billion in August, according to a government report released today. Imports from China increased to a record $27.6 billion in September. U.S. exports to the Asian nation fell to $4.6 billion.

Growing Deficit

The growing deficit in trade with China overshadowed a narrowing of the overall U.S. trade deficit. The shortfall, which was smaller than forecast, declined to $64.3 billion from an all-time high in August of $69 billion, the Commerce Department said in Washington. Economists surveyed by Bloomberg News called for a trade deficit of $66 billion.

Gold rose after the announcement by the Chinese central bank's governor. Futures for December delivery increased $18.50, or 3 percent, to $636.80 an ounce.

When asked whether China planned to shift its reserves away from Treasury notes and into higher-yielding U.S. corporate and mortgage-backed debt, Zhou said China is considering ``lots of instruments'' for diversification, Reuters reported.

``All central banks are trying to diversify,'' he told Reuters on the sidelines of a European Central Bank conference in Frankfurt. ``We have had a very clear diversification plan for several years.''

`Waiting and Fearful'

``The market has long been waiting and fearful of any Chinese indications to diversify,'' said Brian Dolan, research director at Forex.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey, which has about $250 million worth of funds under management. ``The prime beneficiaries will be the euro, yen, pound and Australian dollar.''

The People's Bank of China joins the Bank of Russia and the Swiss National Bank in announcing intentions to diversify currency holdings in the past month.

``The long-term impact is going to be dramatic and sustainable,'' said Firas Askari, head currency trader at BMO Capital Markets in Toronto. ``The dollar has long been the reserve currency for the entire world. Now with central banks saying they are going to diversify away from the dollar, the dollar will suffer.''

The yuan is trading near its strongest since China revalued the currency and allowed it to move as much as 0.3 percent in a day against a basket of currencies. The yuan closed at 7.8665 per dollar in Beijing from 7.8661 yesterday.

Criticized by Lawmakers

China has been criticized by U.S. lawmakers who say it works to keep its currency undervalued to maintain cheap exports, worsening the U.S. trade deficit.

The yuan has gained 2.6 percent this year compared with a 7.8 percent gain for the South Korean won, a 6.3 percent advance for the Philippines peso and a 0.2 percent decline in the yen.

Since Sept. 27, the date by which Senators Charles Schumer and Lindsey Graham had threatened to hold a vote on a bill to impose a 27.5 percent duty on Chinese goods to help narrow the U.S. trade deficit, the Chinese currency has gained 0.5 percent. Since then the won has risen 0.8 percent, the peso has gained 0.5 percent and the yen has fallen 0.4 percent.

Treasury Secretary Henry Paulson persuaded the senators to delay the vote.

The euro gained initially versus the dollar and reached a record against the yen on speculation the European Central Bank is more likely to increase interest rates compared with the Federal Reserve and the Bank of Japan.

The 12-nation single currency rose the most against the yen in almost eight weeks and climbed versus the dollar after ECB President Jean-Claude Trichet wrote in the Financial Times today that the central bank needs to address money-supply growth. Bank of Japan board member Atsushi Mizuno yesterday said the BOJ hasn't any set plans to push borrowing costs higher this year.

The euro rose to 151.28 yen, from 150.34 yesterday. It earlier reached an all-time high of 151.48 yen.

The European Central Bank has increased its key lending rate four times this year to 3.25 percent from 2.25 percent. The Bank of Japan has left its benchmark at 0.25 percent since lifting it for the first time in almost six years in July.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Min Zeng in New York at mzeng2@bloomberg.net.

Last Updated: November 9, 2006 17:12 EST