Euro, Dollar Fall as China's Yuan Policy Boosts Growth Outlook

The Dollar Index rose for a second day, erasing an earlier loss as optimism faded that China’s vow to add more flexibility in the yuan’s fixed exchange rate would strengthen the world’s economic recovery.

The greenback advanced versus 9 of its 16 most-actively traded counterparts, including the South African rand, Norwegian krone and Canadian dollar, as stocks fell and the euro’s slump deepened. Foreign-exchange strategists said an appreciation of the yuan may force consumers to cut spending on products made in China. The Australian and New Zealand dollars pared gains that took them to one-month highs.

“The euphoria of the weekend’s move with China has been discounted pretty quickly,” said Macneil Curry, a technical analyst at Barclays Plc in New York. “Risk across the board is coming under a bit of pressure here, and to a certain degree that’s being pushed by a higher dollar.”

The Dollar Index, which tracks the U.S. currency against those of six major trading partners, rose 0.3 percent to 85.991 at 5 p.m. in New York. The greenback appreciated 0.6 percent to $1.2312 per euro, from $1.2388 on June 18. Australia’s currency gained 0.5 percent to 87.65 U.S. cents after trading almost a full cent higher at 88.59, the strongest since May 17. New Zealand’s dollar traded at 70.82 U.S. cents, down from today’s high of 71.53 cents, the highest level since May 14.

The yen fell 0.4 percent to 91.11 per dollar, from 90.71 on June 18, and rose 0.2 percent to 112.22 per euro, from 112.40.

‘More Expensive’ Imports

“We’re buying our imports from China; they’re going to be more expensive,” said Michael Woolfolk, a managing director at Bank of New York Mellon Corp. in New York, the world’s largest custodial bank. “That’s inflation, that means higher interest rates in Europe and the U.S., that means ultimately slower growth as well.”

The Standard & Poor’s 500 Index fell 0.4 percent after earlier gaining as much as 1.2 percent. Crude oil futures for July delivery traded at $77.35 a barrel in New York after rising to as high as $78.92.

The euro dropped for a second day against the dollar, erasing earlier gains as European Central Bank President Jean- Claude Trichet said governments in breach of European Union fiscal rules could face tougher punishment, including withdrawal of voting rights. Fitch Ratings said it downgraded BNP Paribas’ long-term issuer default rating to AA- from AA. The rating company cited a “deterioration” of the bank’s asset quality.

‘Fundamental Issues’

“I’m not seeing or particularly hearing about people getting into European assets because it’s too premature -- there’s still a lot of risk to the downside,” said Fabian Eliasson, head of U.S. currency sales at Mizuho Financial Group Inc. in New York. “You still have a lot of fundamental issues about what they’re going to do to help sustain growth.”

The euro will probably trade between $1.15 and $1.20 heading into the end of the year, Eliasson said. The currency has fallen 14 percent this year, according to Bloomberg data.

The Swiss franc climbed to a record versus the euro after the nation’s central bank softened its stance last week on limiting the currency’s gains as the threat of deflation faded. The Swiss National Bank said June 17 that the risk of deflation as “largely disappeared.” The franc touched 1.3667 per euro.

The People’s Bank of China signaled two days ago it’s abandoning the 6.83 yuan peg to the dollar adopted to protect exporters during the financial crisis.

‘Excessive’ Export Reliance

The central bank made the yuan announcement in a posting on its website a week before leaders from the Group of 20 meet in Toronto. It said in a follow-up statement that a more flexible currency will “direct resources to domestic-demand driven sectors such as services” and help curb an excessive reliance on exports, signaling it anticipates the currency will rise.

The yuan has been held near the same rate since mid-2008. It rose today as much as 0.44 percent to 6.7962 per dollar, the steepest gain since October 2008.

South Korea’s won and Malaysia’s ringgit led Asian currencies higher on optimism demand for the region’s exports will increase. The won strengthened 2.6 percent to 1,171.95 per dollar, and the ringgit appreciated 2.1 percent to 3.1850.

Colombia’s peso strengthened to a three-month high after former Defense Minister Juan Manuel Santos was elected president in a landslide victory and the central bank said it will end its daily dollar purchases this month.

The peso jumped as much as 1.4 percent to touch 1,883.20 per dollar, the strongest level since March 10, before trading at 1,893.03.

To contact the reporters on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net; Catarina Saraiva in New York at asaraiva5@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.