Dollar Gains Sharply Vs Rivals As Investors Seek Safety

By Bradley Davis
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--The dollar racked up gains across the currency board Tuesday after China surprised investors by increasing key interest rates in an effort to put a brake on its rapid economic growth, while the Bank of Canada issued a tepid assessment of the global recovery.

Worried about the specter of a global slowdown, investors rushed into the perceived safety of the dollar, sending the ICE Dollar index, which tracks the greenback's performance against a trade-weighted basket of currencies, up more than 1.5%, its strongest gain in more than two months.

The move into the dollar is a reversal of its recent performance, as the U.S. currency has been under pressure in recent weeks with investors speculating the Federal Reserve could soon act to stimulate the sagging U.S. economy.

China's surprise rate hike sent investors scrambling into the dollar, torpedoing assets that have been bet against it, including gold, oil and stocks, where even good earnings reports haven't stanched the bleeding. A slower recovery in both China and the U.S. would squelch the appetite for commodities in particular.

"Any attempt to slow the Chinese economy will have ramifications," across the globe, said John McCarthy, manager of currency trading at ING Capital Markets in New York.

The China decision also led investors out of currencies tied to the pace of global growth, especially the commodity-linked Australian and New Zealand dollars, which depend on China's growth and which both dropped against the dollar. After touching parity against the greenback Friday, the Australian dollar has dropped below 97 U.S. cents, losing more than 2% against the greenback Tuesday.

"Investors are nervous," said Amelia Bourdeau, senior G-10 currency strategist at UBS in Stamford, Conn.

Bourdeau said that is because a slowdown in China could spread to other emerging-market economies, while investors also worry the Fed's response to the U.S.'s slowing economy won't be enough to kickstart domestic growth. A slower recovery in both China and the U.S. would squelch the appetite for commodities in particular.

That one-two punch benefited the dollar against a swath of its competitors, including rivals such as the euro, which declined by more than 1.45%, and emerging competitors such as the South African rand, which fell nearly 1.5%.

The Bank of Canada sped the flight to the safety of the dollar after it left key rates unchanged, but issued a more-cautious view of its economic picture and the global picture as a whole.

The commodity-linked Canadian dollar, already under pressure by the China decision, gave up more ground as Canada's central bank said the global recovery is entering a new phase, and that it expects the U.S. recovery to be weaker than expected. The U.S. dollar gained nearly 1.4% against the Canadian currency.

Tuesday afternoon, the euro was at $1.3730 from $1.3943 late Monday, according to EBS via CQG. The common currency dipped as low as $1.3713, its lowest level in two weeks. The dollar was at Y81.58 from Y81.25, while the euro was at Y112.01 from Y113.28. The U.K. pound was at $1.5697 from $1.5887. The dollar was at CHF0.9709 from CHF0.9590.

The ICE Dollar Index was at its strongest level in two weeks, at 78.218 from 77.184 Monday.


To see the performance of the ICE Dollar Index, please see:

http://dowjoneswebservices.com/chart/view/4791


China's central bank said Tuesday it will raise its benchmark deposit and lending rates by 0.25 percentage point, the first increase since December 2007. The latest move represents the strongest effort yet by Beijing to withdraw the monetary policy stimulus it introduced during the global financial crisis and comes amid rising inflationary pressures.

The dollar also gained strongly against the Brazilian real, which was down more than 0.8% by afternoon North American trading in the wake of a new round of government tax hikes aimed at foreign investment inflows.

Following the local market's Monday close, Brazil's government announced another round of tax increases for certain foreign investment inflows. Finance Minister Guido Mantega said the tax moves were part of a frank effort to stem the unwanted appreciation of the Brazilian real. The strong real hurts Brazilian exports.

With the ICE Dollar Index strengthening, Deutsche Bank's PowerShares U.S. Dollar Index Bearish exchange-traded fund was down 1.43% from late Monday, while its PowerShares U.S. Dollar Index Bullish was up 1.7%. The two exchange-traded funds are based on Deutsche Bank currency-futures indexes, whose composition mirrors that of the ICE's Dollar Index.


-By Bradley Davis, Dow Jones Newswires; 212-416-2654; bradley.davis@dowjones.com

(Tom Murphy in Sao Paulo and Katie Martin in London contributed to this article.)


(END) Dow Jones Newswires

October 19, 2010 16:18 ET (20:18 GMT)