The dollar recovered early losses to trade higher against the euro on Tuesday after the Chinese central bank said it would gradually exit from regular intervention in the foreign exchange market. Zhou Xiaochuan, head of the People's Bank of China, said in a book on reforms published on Tuesday that China will gradually expand the yuan trading band to help make the currency more flexible and market-driven. This followed reform plans last week to let the market play a "decisive" role in the economy.
Analysts said the plan could be negative for the euro because the central bank automatically diversifies into euros a large portion of the dollars it receives when it intervenes in the currency market. "Fewer US dollars will need to be recycled into euros," said Adam Myers, senior FX strategist at Credit Agricole. He added, however: "People have leaped on the comments. But with no timing, who knows when they're going to do it."
The euro was down 0.1 percent at $1.3493, having earlier been as high as $1.3544. Traders said the German ZEW survey weighed slightly on the euro. Although the economic sentiment reading hit its highest level in four years in November, the survey's current conditions index fell and was below forecasts. The dollar index was down marginally at 80.771, but up from a low of 80.56 earlier in the session.
The dollar has been under pressure since remarks last week by Janet Yellen, the US Federal Reserve's chief in waiting, widely interpreted as confirming her dovish stance. Since Yellen's remarks at her Senate confirmation hearing, US Treasury yields have fallen, dragging down the dollar index, which is correlated to bond yields. On Monday Federal Reserve Bank of New York President William Dudley said he was "more hopeful" about the US economy but also said he expected "very accommodative" monetary policy to be in place "for a considerable period of time".
"Fed tapering still remains the market's main obsession," said Jane Foley, senior currency strategist at Rabobank. "What we've had with QE (quantitative easing) is a recognition that it could be some time before the Fed moves away from stimulus." Investors were looking ahead to the release on Wednesday of minutes from the Fed's October meeting for clues to how long it will maintain its monthly $85 billion of bond purchases. The Australian dollar continued its strong run against the US dollar, gaining 0.5 percent to $0.9420, while the New Zealand dollar was up 0.2 percent at $0.8346.
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