FOREX-Dollar falls as China reforms bolster risk, US stocks fizzle
* Funding currencies drop as global stocks push higher
* Activist investor Carl Icahn says cautious on the stock market
* Fed Dudley said not seen enough economic momentum
* Focus on U.S. retail sales data
NEW YORK, Nov 18 (Reuters) - The dollar dropped against the yen and euro on Monday after China announced its most sweeping economic and social reforms in nearly three decades, lifting investors' appetite for higher-yielding currencies.
Increased demand for riskier assets had earlier pushed the dollar down to its lowest against the euro since Nov. 6 while global equity markets climbed on China's plans.
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.
Dollar losses versus the yen extended as a U.S. stock rally fizzled. Activist investor Carl Icahn said he is "very cautious" on the market, saying he could see a "big drop" because earnings at many companies are fuelled more by low borrowing costs rather than the strength of management.
The dollar was earlier buoyed by hopes the U.S. central bank will curb its stimulus in the coming months.
Top Federal Reserve officials from opposite sides of the policy spectrum pointed to improvement in the U.S. economy on Monday, adding more weight to the notion that the central bank is getting close to reducing the pace of its monthly asset purchases.
William Dudley, president of the Federal Reserve Bank of New York and one of the staunchest supporters of the Fed's easy-money policies, cited labor market improvements and stronger-than-expected growth in the third quarter as signs of optimism for the U.S. economic recovery.
"Dudley acknowledged recent improvement in the economy and seemingly kept the door cracked to a stimulus taper sooner rather than later," said Joe Manimbo, senior market analyst, at Western Union Business Solutions in Washington D.C..
"The remarks by Dudley carry a bit more weight since he is seen among the arch doves at the central bank who tend to favor easy policies to boost the economy and strengthen the job market," he said.
The dollar index, which gauges the greenback's value against a basket of six major currencies, slipped 0.2 percent to 80.728 . 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 dollar came off highs last week as the Federal Reserve's chief-in-waiting, Janet Yellen, bolstered hopes the bank would keep its $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.
Investors are keeping a close eye on upcoming U.S. 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 favorable bets in the dollar and turned even more negative on the yen in the week ended Nov. 12.
Against the yen, the dollar last traded down 0.3 percent at 99.94 yen, according to Reuters data.