Dollar weak after China reserve comments

SINGAPORE (Reuters) - The dollar remained weak on Wednesday, after falling on a report China would stop stockpiling foreign exchange reserves, but traders expected it would bounce before the Federal Reserve's meeting ends later in the day.

More analysts were also taking the view that the dollar's decline was unwarranted and that People's Bank of China Governor Zhou Xiaochuan's comment about China's $1 trillion stash of reserves had been incorrectly interpreted.

Zhou was quoted by the Emerging Markets magazine, a Euromoney publication, as saying "many people say that foreign exchange reserves in China are (already) large enough. We do not intend to go further and accumulate reserves."

"I have never heard the PBOC say that it is their intention to accumulate FX reserves. So, in that respect, I don't really see how the comments are really positive or negative for the dollar," said UBS currency strategist Ashley Davies.

Traders in Asia were scouring Zhou's speech, with some suspecting he spoke in Chinese and his comments may have been translated inaccurately.

"Our read on this is that he's saying it is not China's deliberate intention to increase its reserves, but it may be a secondary consequence of policy," said Gerrard Katz, head of North Asian currency trading at Standard Chartered Bank.

China's reserves are already the world's largest and have been growing at a brisk pace as China buys foreign currencies to keep the yuan from rising beyond the top of a tight trading band.

Analysts noted that China would still be accumulating reserves in a new investment agency which is expected to manage some $200 billion of assets and aim at increasing returns by investing in a wider array of financial instruments.

"They keep clarifying that the dollar will not be sold with the new fund," Katz said.

Trading in the Asian session was subdued with Japanese markets closed for a spring holiday.

The dollar was quoted at 117.30 yen, up from lows around 116.90 JPY=. It had fallen from 118.01 on Tuesday.

The euro was at 156.10 yen EURJPY=. Against the dollar, the euro traded at $1.3315 EUR=, little changed from levels overnight and up from Tuesday's lows of $1.3268.

The Canadian dollar, one of Tuesday's biggest gainers against the U.S. dollar after higher-than-expected Canadian inflation data, was quoted around C$1.1609 CAD=, near Tuesday's 3-week high of 1.1595.

FOMC AND LAND PRICES

The Federal Reserve's two-day meeting ends on Wednesday, although the dollar seemed to be reacting mostly to Zhou's comments.

The Fed is seen leaving rates steady at 5.25 percent, but any mention of recent equity turmoil or easing inflation could weaken the dollar further.

Rallying U.S. equities suggested markets were pricing in a soft Fed stance -- the Dow Jones industrial average .DJI gained half a percent on Tuesday and nearly 3 percent from last week's trough -- although some analysts said they could be surprised.

"Perhaps the FOMC won't be as dovish as the market is hoping for," Davies said.

Yet, the yen was unlikely to lose much ground ahead of Thursday's release of a Japanese government survey on nationwide land prices for 2006.

Bank of Japan Governor Toshihiko Fukui said on Tuesday land price rises were accelerating. Rising land costs and currency rates were among factors that could affect monetary policy, he said.