November 19, 2013 / 3:21 PM / in 4 years

FOREX-Dollar edges lower as China says to make yuan more flexible

4 Min Read

* China plan to exit intervention seen as dollar-negative
    * Overarching theme is still Fed tapering

    By Gertrude Chavez-Dreyfuss
    NEW YORK, Nov 19 (Reuters) - The dollar edged lower on
Tuesday in choppy trading after the Chinese central bank said it
would gradually exit from regular intervention in the foreign
exchange market.
    But analysts said over the medium term, the dollar is still
expected to perform better than the euro and yen, as the Federal
Reserve prepares to wind down its stimulus, a process that many
expect will get under way in March next year.
    The market, meanwhile, got one theme going on Tuesday that
doesn't include the Fed. Zhou Xiaochuan, head of the People's
Bank of China, said in a book on reforms published on Tuesday
that China will gradually expand the yuan trading band to help
make the currency more flexible and market-driven. This followed
reform plans last week to let the market play a "decisive" role
in the economy.  
    The PBoC comments spurred some modest dollar selling, as the
widening of the Chinese trading band meant the yuan would
strengthen against the dollar. But analysts said the remarks
don't mean that China will move the trading band overnight. It
could happen though over the next five years.
    "All announced moves from China over the past eight years
toward further flexibility have been followed by a marked
reduction in the value of the dollar index," said Douglas
Borthwick, managing director at Chapdelaine Foreign Exchange. 
    He added that a convertible yuan is a condition for the yuan
to be included in the International Monetary Fund's special
drawing rights basket. 
    "Once convertibility is achieved, reserve managers will
flock to the yuan as an additional reserve currency. Its
position will take market share away from other overweight
reserve currencies, most notably the U.S. dollar."
    The dollar index, a gauge of the greenback's value against
six major currencies, was down 0.2 percent at 80.703.
    The Australian dollar rallied on the China news, rising 0.4
percent to US$0.9416.
    The euro was flat on the day at $1.3519, having
earlier been as high as $1.3544.
    Traders said the German ZEW survey weighed slightly on the
euro. Although the economic sentiment reading hit its highest
level in four years in November, the survey's current conditions
index fell and was below forecasts. 
    The dollar, however, has been under pressure since remarks
last week by Fed chair nominee Janet Yellen were widely
interpreted as confirming her dovish stance. 
    Since Yellen's remarks at her Senate confirmation hearing,
U.S. Treasury yields have fallen, dragging down the
dollar index, which is correlated to bond yields.
    But even though Yellen said the stimulus would be in place
for some time and those comments were negative for the dollar,
many market participants believe the greenback would start
rallying before the Fed actually starts reducing its asset
    "We're generally bullish on the dollar in the bigger picture
even though we don't expect the Fed to taper until March 2014,"
said Greg Moore, currency strategist at TD Securities in
Toronto. "People would start buying the dollar in anticipation
of that tapering."
    On Monday, Federal Reserve Bank of New York President
William Dudley said he was "more hopeful" about the U.S. economy
but also said he expected "very accommodative" monetary policy
to be in place "for a considerable period of time".
    Investors were looking ahead to the release on Wednesday of
minutes from the Fed's October meeting for clues to how long it
will maintain its monthly $85 billion of bond purchases.

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