FOREX-Dollar, yen softer as China reforms bolster risk appetite

Mon Nov 18, 2013 11:45am EST

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By Gertrude Chavez-Dreyfuss

NEW YORK, Nov 18 (Reuters) - The safe-haven dollar and yen fell on Monday after China announced its most sweeping economic and social reforms in nearly three decades, boosting investor appetite for higher-yielding currencies such as the Australian and New Zealand dollars.

China shares posted their biggest gain in more than two months on Monday, while global shares hit their highest levels since the start of 2008.

"Risk appetite is strong ... after details of China's reform proved more dramatic than expected, suggesting a focus on market liberalization and reforms in both the government role and the broader corporate structure," said Camilla Sutton, chief currency strategist, ScotiaBank in Toronto.

The dollar index, which gauges the greenback's value against a basket of currencies, slipped 0.2 percent to 80.688, pushing the euro up 0.2 percent to $1.3519.

The euro received some support after data showed the euro zone's trade surplus grew more than expected in September.

The Australian dollar rose as well, up 0.7 percent at US$0.9399, while the New Zealand dollar gained 0.3 percent to US$0.8366.

Both the Aussie and kiwi tend to perform well when investors are prepared to take on more risk or on better prospects for growth in China.

Kathy Lien, managing director at BK Asset Management in New York, said these currencies continued to benefit from China's reform policies "as investors hope that more stability for China will mean long-term benefits for the global economy."

The yen also lost ground against most currencies, with the Australian dollar rising 0.1 percent to 94.01 yen and the New Zealand dollar edging higher to 83.69 yen.

The Japanese currency is considered a safe-haven asset because it is highly liquid. Both the yen and dollar, with interest rates near zero, are used to fund the purchases of riskier in so-called "carry trade" transactions.

The dollar came off highs last week as the Federal Reserve's chief-in-waiting, Janet Yellen, bolstered hopes that it would keep it $85-billion-a-month bond purchases intact this year. Most investors now expect the Fed to start paring stimulus only in March 2014, meaning there will be more dollars flushing around.

The European Central Bank has also pledged to keep interest rates near record lows and may yet take more action while the Bank of Japan is also set to be aggressive in providing monetary stimulus to reach its inflation goal. The BoJ will hold a regular policy meeting this week and is expected to maintain its ultra-loose policy.

Morgan Stanley's head of European currency strategy Ian Stannard also pointed to reform plans for Japanese pension funds, which could weaken the yen.

"The suggestions ... are that we could see some diversification out of JGBs (government bonds) and into higher-risk assets, and allocations overseas, which should put pressure on the yen," he said.

Investors are keeping a close eye on upcoming U.S. data to gauge the timing of any tapering of the Fed's bond buying.

A key piece on data, due on Wednesday, is October retail sales. Data on Friday showed currency speculators added to more favorable bets in the dollar and turned even more negative on the yen in the week ended Nov. 12.

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