China's move to slow growth drives dollar higher

AP News
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Posted: Oct 19, 2010 3:46 PM
China's move to slow growth drives dollar higher

The dollar rose Tuesday after China moved to slow its rapid economic growth, sending investors scurrying from emerging markets to the relative safety of the dollar.

The central bank of the world's No. 2 economy raised a key interest rate for the first time since 2007 in an effort to keep that country's economy from overheating. China's growth has been a key ingredient in the global economic recovery.

The interest rate boost slammed demand for currencies of developing countries whose exports have surged to feed China's increasing demand for raw materials. That has sent their currencies soaring versus the dollar in recent months.

On Tuesday, demand for the dollar's perceived safety was back in vogue after China's move. It was a rare climb in nearly two months of sharp declines.

"You have a reversion to risk aversion," said Joseph Trevisani, chief market analyst of FXSolutions.

In late trading in New York, the euro slid to $1.3744 from $1.3998, while the British pound dropped to $1.5699 from $1.5936. The dollar rose to 81.46 Japanese yen from 81.21 yen.

The dollar has been steadily dropping since late August, when Federal Reserve Chairman Ben Bernanke first suggested that the central bank was ready to offer more support for the U.S. economy. That would drive interest rates lower, perhaps helping fuel borrowing and spending, but drag on the currency's value.

A broad measure of the dollar versus six other currencies had declined more than 7 percent from late August through Monday. On Tuesday, that index regained some ground, popping 1.7 percent.

Countries with close ties to the Chinese economy suffered big drops in their currencies. The Australian dollar slid 1.4 percent, falling back from a 28-year high versus the dollar struck on Friday. The dollar was also sharply higher versus the Brazilian real, the Scandinavian currencies, the South Korean won and the New Zealand dollar.

Prices for commodities such as oil and copper tumbled, while the Dow Jones industrial average fell by more than 1 percent.

Also helping boost the dollar were comments from Treasury Secretary Timothy Geithner on Monday that suggested the government was not seeking to weaken the dollar to boost the U.S. economy.

His comments come ahead of this weekend's meeting in Korea of finance ministers and central bankers from the Group of 20 biggest economies. Recent tensions over countries moving to weaken their currencies and the Chinese government's reluctance to let the yuan quickly rise in value are expected to be a prominent issue at the meetings.

In other trading Tuesday, the dollar soared to $1.0339 Canadian dollars from 1.0145 Canadian dollars after the Bank of Canada kept its key interest rate unchanged and cut its economic growth outlook through 2011.

The dollar also jumped to 0.9702 Swiss francs from 0.9571 Swiss francs.