Dollar Advances as China Rate Increase Sparks Demand for Safety

27/12/2010 00:00 AST

The dollar was near a three-week high against the euro after China’s second interest-rate increase since mid-October highlighted concern that efforts to tame inflation will curb global growth.

The yen earlier touched a three-week high against the euro as JPMorgan Chase & Co. and Morgan Stanley said China’s monetary tightening in 2011 may be mainly in the first half as officials tackle the fastest inflation in more than two years. The dollar was also supported before data forecast to show U.S. consumer confidence advanced. Asian currencies halted gains as China’s rate increase damped the outlook for spending in the No. 1 export market for South Korea, Malaysia and Thailand.

“Reaction on China’s move has been somewhat muted, still the dollar is being supported against the euro,” said Kazuyuki Kato, treasury department manager in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second-biggest bank. “Investors are not willing to take risk, as the market is thin near year- end.”

The dollar was at $1.3127 per euro as of 2:02 p.m. in Tokyo from $1.3122 last week. It touched $1.3055 on Dec. 23, the highest since Dec. 1. The yen was at 108.81 per euro from 108.77. It earlier reached 108.43 per euro, the strongest since Dec. 1. The dollar fetched 82.89 yen from 82.88 yen.

The People’s Bank of China increased key one-year lending and deposit rates by 25 basis points on Christmas Day in its second move since mid-October. The change took effect yesterday.

China’s benchmark lending rate rose to 5.81 percent, compared with 7.47 percent before cuts from late 2008 to counter the global financial crisis. It will climb to 6.56 percent by the end of next year, according to the median forecast in a Bloomberg News survey of economists this month.

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Bloomberg