Commodity currencies slipped on Tuesday after China said it would tighten banks' reserve requirements, raising concerns that Chinese demand could fall and slow the global economic recovery. China's central bank surprised world markets with a statement that it would raise the reserve requirement ratio by a half-percentage point, effective next week, in the clearest sign yet of monetary policy tightening.
Commodity-linked currencies - including the Australian, New Zealand and Canadian dollars - all hit session lows against the US dollar, following a sell-off in gold prices. The commodity currencies also tumbled against the Japanese yen.
"The Chinese announcement has the potential to be this week's most important currency market driver and the market reaction over the next 24-48 hours bears close watching," Nick Bennenbroek, head of currency strategy at Wells Fargo in New York, said in a note to clients.
The announcement underlined the risk tied to those currencies which, along with commodities, rallied for much of 2009 on the view that the global economy was on a path toward recovery. China is also a major importer of commodities and any drop in its demand is seen as a negative for commodity-linked currencies. In late trading in New York, the Australian dollar traded 1.3 percent lower at $0.9196. It touched a two-month high on Monday.
The New Zealand and Canadian dollars also fell after China's announcement, which earlier triggered broad selling in gold. The New Zealand dollar was last down 0.6 percent at US $0.7384, while the US dollar rose 0.7 percent against the Canadian dollar to C$1.0399. The dollar also gained 0.5 percent against South Africa's rand to 7.42 rand.
The Australian dollar slipped 2.3 percent against the yen while Canada's dollar fell 2 percent against the Japanese currency. A report showing the US trade deficit widened more than expected in November had a limited impact on the dollar.
Salvaggio said that against the dollar, the euro was likely to trade in a range between $1.4352 and $1.46 in coming days. The euro was last down 0.2 percent at $1.4486, after trading as low as $1.4454 earlier in the session. Analysts at Citigroup said in a note that technical indicators point to further gains in the euro, saying it could move above $1.47 in the short term.
The European currency got some support after Greek Finance Minister George Papaconstantinou told a German newspaper on Tuesday that Greece had no more "skeletons in the closet," and the country had a solid basis for cutting its deficit. Worries about Greece's financial situation have weighed on the euro in recent months. The dollar also seesawed against the yen. The greenback fell 1.3 percent against Japan's currency and last traded at 90.91 yen, remaining near a three-week low.
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