The safe-haven dollar fell on Monday after China announced its most sweeping economic and social reforms in nearly three decades, lifting investors' appetite for higher-yielding currencies such as the Australian and New Zealand dollars. Increased investor appetite for riskier assets pushed the dollar to its lowest against the euro since November 6 while global equity markets climbed, driven by China's plans, the world's second largest economy.
China shares posted their biggest gain in more than two months on Monday, while global shares hit their highest levels since the start of 2008. The China Enterprises Index of the top Chinese listings in Hong Kong soared 5.7 percent for its biggest daily gain since December 1, 2011. "Risk appetite is strong ... after details of China's reform proved more dramatic than expected, suggesting a focus on market liberalisation and reforms in both the government role and the broader corporate structure," said Camilla Sutton, chief currency strategist, ScotiaBank in Toronto.
The dollar index, which gauges the greenback's value against a basket of six major currencies, slipped 0.1 percent to 80.738. The euro, which dominates the dollar index's composition, last traded up 0.1 percent to $1.3508. The euro received some support after data showed the euro zone's trade surplus grew more than expected in September. The Australian dollar rose as well, last trading up 0.2 percent at US $0.9386, while the New Zealand dollar gained 0.2 percent to US $0.8384.
Both the Aussie and kiwi tend to perform well when investors are prepared to take on more risk or on better prospects for growth in China. Kathy Lien, managing director at BK Asset Management in New York, said these currencies continued to benefit from China's reform policies "as investors hope that more stability for China will mean long-term benefits for the global economy."
The Japanese currency is considered a safe-haven asset because it is highly liquid. Both the yen and dollar, with interest rates near zero, are used to fund the purchases of riskier in so-called "carry trade" transactions. The dollar came off highs last week as the Federal Reserve's chief-in-waiting, Janet Yellen, bolstered hopes that it would keep it $85-billion-a-month bond purchases intact this year. Most investors now expect the Fed to start paring stimulus only in March 2014, meaning there will be more dollars flushing around.
The European Central Bank has also pledged to keep interest rates near record lows and may yet take more action while the Bank of Japan is also set to be aggressive in providing monetary stimulus to reach its inflation goal. The BoJ will hold a regular policy meeting this week and is expected to maintain its ultra-loose policy. Morgan Stanley's head of European currency strategy Ian Stannard also pointed to reform plans for Japanese pension funds, which could weaken the yen.
"The suggestions ... are that we could see some diversification out of JGBs (government bonds) and into higher-risk assets, and allocations overseas, which should put pressure on the yen," he said. Against the yen, the dollar last traded down 0.1 percent at 100.08 yen, according to Reuters data. Investors are keeping a close eye on upcoming US data to gauge the timing of any tapering of the Fed's bond buying. A key piece on data, due on Wednesday, is October retail sales. Data on Friday showed currency speculators added to more favourable bets in the dollar and turned even more negative on the yen in the week ended November 12.
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