China short-term rates spike boosts dollar, yen, Swiss franc

NEW YORK (Oct 23)  The safe-haven dollar, yen and Swiss franc all rose on Wednesday as risk appetite declined following a spike in China's short-term money market interest rates.

Concerns about soft U.S. jobs data for September, which  appeared to rule out a cut in the Federal Reserve's monetary stimulus before next year and caused the dollar's plunge on Tuesday, took a back seat, as Chinese money market rates climbed to levels not seen since July. The People's Bank of China failed to inject cash for a second day.

Rising liquidity needs for Chinese corporate tax payment deadlines and worries about bad banking debt seemed partly responsible for the jump in short-term rates, analysts said.

The rate spike was short-lived but caused a market panic nevertheless, prompting a scramble for safe-haven dollars, Swiss francs and yen.

"The weight of a weak U.S. nonfarm (payroll data released on Tuesday) is surpassed by rising risk aversion on concerns over China's money market. Profit-taking takes hold," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto.

The Canadian dollar, meanwhile, plunged after the Bank of Canada on Wednesday dropped reference to any interest rate increase for the first time since April 2012, citing weak economic growth.

In midday New York trading, the U.S. dollar rose against the riskier and commodity-linked currencies such as the Australian and New Zealand dollars. The Aussie dollar fell 0.8 percent versus the greenback to US$0.9629, while the New Zealand currency dropped 1.5 percent to US$0.8385.

The euro was flat to slightly lower at $1.3778. On Tuesday, it hit $1.3792, its strongest since mid-November 2011.

European Central Bank President Mario Draghi took a hard line on the banks, saying on Wednesday a common mechanism for dealing with troubled banks should be in place by 2015. That has put a dampener on the euro.

    The yen was also in demand, pushing the dollar down 0.8
percent at 97.31 yen and the euro 0.9 percent weaker at
134.06 yen. 
    Another safe haven, the Swiss franc, also rose, as the
dollar and euro both slipped 0.3 percent to 0.8924 and
1.2296 francs, respectively.
    Against a basket of widely traded currencies, the dollar
index was little changed at 79.256. It fell as low as
79.137, its weakest since early February.
    Still the outlook for the U.S. dollar remained downbeat.
Tuesday's September U.S. jobs report has pushed out expectations
for a reduction in the Fed's asset-buying plan well into 2014,
Scotiabank's Sutton said. That left the Fed's balance sheet
expanding rapidly while those of other central banks are
stabilizing or contracting.
    A majority of U.S. primary dealers polled by Reuters now
believe the Federal Reserve will not start cutting its $85
billion of monthly bond purchases until March.
    Strategists pointed to the Fed's Oct. 29-30 policy meeting,
which could indicate whether there has been any substantial
change to Fed policymakers' views on the economy.
    Against the Canadian dollar, the greenback surged 0.9
percent to C$1.0378
    "Sentiment could really turn against the loonie if investors
start to price in the risk of a rate cut as the next policy
move," said Joe Manimbo, senior market analyst at Western Union
Business Solutions in Washington.
    Canada's central bank meets eight times a year, and the
final meeting for 2013 is set for Dec. 4.
    The euro has gained 4.4 percent so far this year against the
dollar. It recently hit a two-year peak against a trade-weighted
    Strategists said if the euro's ascent gathered pace the ECB
could adopt some form of verbal intervention or other measures
to dampen its strength. A stronger euro is negative for the euro
zone's exporters.
    "Euro/dollar is trading at new highs for the year and the
question is what will the response be from the ECB?" said Chris
Turner, head of FX strategy at ING in a note to clients. 
    "Euro zone headline inflation is low, and the ECB could
repeat its February stance that the strong euro increases
downside risks to inflation."