Commodity currencies slipped on Tuesday after China said it would tighten banks' reserve requirements, raising concerns the move may dent Chinese demand and slow global economic recovery. Separately, the dollar held gains against the euro and a currency basket after a Chinese sovereign wealth fund official said he did not think the US currency would depreciate further.
China's central bank surprised markets with a statement that it would raise the reserve requirement ratio by 0.5 percentage points, effective next week, in the clearest sign yet of monetary policy tightening. Commodity-linked currencies including the Australian, New Zealand and Canadian dollars hit session lows against the US dollar, following a sell-off in gold prices. They also tumbled against the yen.
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 recovery path. China is a major importer of world commodities and a drop in its demand is seen as negative for commodity-linked currencies.
"It's an indication that the China authorities are being reasonably pro-active and it's going to put a bit of a two-way risk in the idea that commodity currencies are on such a solid path," said Paul Mackel, currency strategist at HSBC in London. "It's probably going to keep these currencies under pressure, at least in the short term." The Australian dollar fell 1.1 percent to the day's low of $0.9205, pulling it away from a two-month high of $0.9326 hit on Monday. By 1248 GMT, it traded at $0.9250.
Against the yen, it fell 1.3 percent to a session trough of 84.48 yen, retreating from 86.20 yen hit on Monday, its strongest since September 2008. Other commodity-linked currencies, including the New Zealand and Canadian dollars, also fell after China's announcement, which triggered broad selling in gold.
The euro slipped 0.2 percent to $1.4485, struggling after the PBOC announcement. Earlier, it had hit the day's low around $1.4455 on the back of comments from China International Corp official Peng Junming that the dollar had hit bottom and had limited further room to fall, while the yen would keep falling.
The comments from China's $300 billion sovereign wealth fund pushed the dollar to the day's high against the yen at 92.43 yen, before pulling back to around 91.60 yen, down 0.6 percent on the day. The greenback trimmed its gains against the euro on lingering concerns last week's US payrolls report indicated the economy remained in the doldrums, and that interest rates would not rise until later in the year.