Dollar rattled as China denies yuan speculation

The dollar was flustered on Friday by market speculation that China might again revalue its yuan currency, but retraced losses after a swift denial from the Chinese central bank.
The greenback regained some ground versus the yen and the euro after a spokesman for the People's Bank of China said: "The yuan's exchange rate is decided by market forces. The issue of a preliminary revaluation or there being a further revaluation does not exist."
The dollar stood at 109.62 yen at 1133 GMT, down 0.40 percent on the day, having hit a session low of 109.37, but still above a seven-week low near 109.05 yen hit in mid-August.
"The market's reaction to the rumour mill earlier today was revealing, however, in that it served to remind us of another cache of ammunition for yen bulls," the Bank of New York said in a research note. Any further revaluation of the undervalued yuan is expected to lift the Japanese yen along with other Asian currencies, damage the dollar and remove some upward pressure from the euro.
China revalued the yuan by 2.1 percent on July 21 and dropped its dollar peg in favour of managing the exchange rate with reference to a basket of currencies.
An influential Chinese economist said on Friday that Beijing was trying to make the yuan more flexible to reflect market supply and demand, but any sharp currency appreciation would harm the fast-growing economy.
Yu Yongding, the only academic member of the Chinese central bank's monetary policy committee, said last month's mild yuan revaluation could hit some exports, but would help reduce the economy's over-reliance on external demand.
Analysts said further volatility was on the cards as investors positioned themselves for China to move again on the yuan, and speculation was gathering steam ahead of Chinese President Hu Jintao's visit to Washington on September 7.
"You would have to argue that there is a chance that at some stage they would have to make another token movement," said Derek Halpenny, currency economist at Bank of Tokyo Mitsubishi.
The euro was up 0.07 percent against the dollar at $1.2307.
Eurozone data showed that M3 money supply grew at its fastest pace since October 2003 in July, boosting expectations that the European Central Bank will adopt a more hawkish tone.