Dollar drops against euro, yen on reserve concerns

By AFP

July 15, 2010 Updated Jun 14, 2009 at 9:42 PM CDT

The dollar fell against the euro and yen Thursday, hit by concerns about its future as the world's leading reserve currency, dealers said.

In late morning London trade, the European single currency rose to 1.4038 dollars, up from 1.3978 in New York late on Wednesday.

Against the Japanese currency, the dollar dropped to 97.83 yen from 98.12 yen on Wednesday.

"The dollar remains caught between two contradictory forces," said Calyon analyst Sebastien Barbe.

"On the one hand, the issue of the diversification of foreign exchange reserves suggests the door is open to further dollar weakness (...) On the other hand, signs of an economic stabilisation in the US accumulate. This could to some extent fuel expectations of rate hikes by the Fed later in 2009," he added.

The dollar was hit by news that a top Russian central bank official said Moscow would shift part of its reserves from US Treasuries into International Monetary Fund (IMF) bonds and commercial bank deposits.

The central bank's first deputy chairman, Alexei Ulyukayev, was quoted as saying "the window of opportunity has arisen to work with other instruments".

His comments echo concerns of other members of the BRIC grouping of key emerging economies Brazil, Russia, India and China, who have touched on the possibility of buying IMF bonds, SMBC chief strategist Daisuke Uno said.

Leaders of the BRIC countries are due to meet next week in Moscow, where the dollar's role as the global reserve currency will be discussed.

Elsewhere in foreign exchange trade on Thursday, the British pound hit the highest level against the euro for more than six months.

The rally, which has seen the pound also rise versus the dollar, comes after a think tank, the National Institute of Economic and Social Research, estimated that the recession-hit British economy in fact grew in April and May.

Meanwhile on the bond market, rising yields were seen as a danger to economic recovery since they could push up other rates including for mortgages, hampering the fragile housing market.

The 10-year bond yield rose as high as 3.99 percent after a new Treasury auction on Wednesday.

"With yesterday's US bond auctions seeing 10-year yields pushed to almost 4.0 percent, the highest for eight months, the dollar remains rattled ahead of today's 30-year auction amid fear that investors are losing their appetite for US assets," Calyon analysts added.

In London trading on Thursday, the euro was changing hands at 1.4038 dollars against 1.3978 dollars late on Wednesday, at 137.23 yen (137.18), 0.8518 pounds (0.8543) and 1.5141 Swiss francs (1.5109).

The dollar stood at 97.83 yen (98.12) and 1.0796 Swiss francs (1.0807).

The pound was at 1.6466 dollars (1.6360).

On the London Bullion Market, the price of gold rose to 956.05 dollars an ounce from 953.75 dollars an ounce late on Wednesday.

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