* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh (Adds China FX reaction)
By Saikat Chatterjee
LONDON, Sept 6 (Reuters) - Riskier currencies including the Australian dollar surged on Friday after China’s central bank cut the amount of cash that banks must hold as reserves, with markets also expecting the European Central Bank to unveil more stimulus next week.
The People’s Bank of China said it was cutting banks’ reserve requirements for the third time this year, sending a ripple of optimism through currency markets, though analysts questioned how much stimulus global central banks have left.
“This won’t be a flood of stimulus,” said Neil Mellor, a senior FX strategist at BNY Mellon in London.
“China and many other countries are in the same boat with fiscal policy constrained by debt and central banks resorting to jawboning and some targeted easing.”
The Chinese currency in the offshore market extended gains and was trading up 0.4% against the greenback at 7.1120 yuan as investors said the latest round of easing indicated Beijing was willing to act to boost the economy.
Edward Park, deputy chief investment officer at Brooks Macdonald Asset Management, who is still overweight on asset allocation to Chinese equities, said “their positioning is an acknowledgement of the fact that the government has a large amount of flexibility to ease further as needed.”
The Australian dollar - its fortunes closely intertwined with the Chinese economy - gained 0.3% to $0.6837 and strengthened 0.7% versus the Swiss franc.
Appetite for riskier assets, already firm in early London trading thanks to strong data out of the United States, received a further boost after China unveiled its latest round of policy easing.
The dollar steadied against its rivals, and was heading for its biggest weekly drop in a month, as markets still expect the Federal Reserve will cut U.S. interest rates this month, even if the U.S. non-farm payrolls report on Friday is stronger than expected.
The dollar index slipped 0.1% to 98.32 and was down 0.54% so far this week, its biggest weekly drop since early August.
“The latest risk rally rests on a number of pillars like the recent upbeat U.S. data, receding political risks in the UK and hopes for an abatement of the US-China trade tensions,” said Valentin Marinov, head of G-10 FX research and strategy at Credit Agricole in London.
Surveys suggested the U.S. economy was in better shape than investors had feared. Services activity accelerated in August and private employers increased hiring more than expected.
The U.S. non-farm payrolls report due later on Friday was expected to show 158,000 jobs were added and the unemployment rate remained unchanged at 3.7% in August.
“Investors are now hoping they can take this week’s positivity over the finishing line, so fingers crossed the August U.S. payroll report ... doesn’t throw a damp towel on the proceedings,” said Stephen Innes, Asia Pacific market strategist at AxiTrader.
Despite the positive data, bond markets expect the Fed to cut interest rates this month. A total of 55 basis points of rate cuts are expected this year.
A combination of likely dovish central banks and decent economic data also encouraged investors to buy the Canadian dollar and the Swedish crown against the U.S. dollar.
The European Central Bank is leaning towards a package that includes a rate cut, a beefed-up pledge to keep rates low for longer and compensation for banks over the side-effects of negative rates, sources told Reuters last week.
Reporting by Saikat Chatterjee; editing by Larry King and Susan Fenton