FOREX-Dollar edges lower as China says to make yuan more flexible

Gertrude Chavez-Dreyfuss
Tuesday, 19 Nov 2013 | 10:19 AM ET

* China plan to exit intervention seen as dollar-negative

* Overarching theme is still Fed tapering

NEW YORK, Nov 19 (Reuters) - The dollar edged lower on Tuesday in choppy trading after the Chinese central bank said it would gradually exit from regular intervention in the foreign exchange market. But analysts said over the medium term, the dollar is still expected to perform better than the euro and yen, as the Federal Reserve prepares to wind down its stimulus, a process that many expect will get under way in March next year. The market, meanwhile, got one theme going on Tuesday that doesn't include the Fed. 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. The PBoC comments spurred some modest dollar selling, as the widening of the Chinese trading band meant the yuan would strengthen against the dollar. But analysts said the remarks don't mean that China will move the trading band overnight. It could happen though over the next five years. "All announced moves from China over the past eight years toward further flexibility have been followed by a marked reduction in the value of the dollar index," said Douglas Borthwick, managing director at Chapdelaine Foreign Exchange. He added that a convertible yuan is a condition for the yuan to be included in the International Monetary Fund's special drawing rights basket. "Once convertibility is achieved, reserve managers will flock to the yuan as an additional reserve currency. Its position will take market share away from other overweight reserve currencies, most notably the U.S. dollar." The dollar index, a gauge of the greenback's value against six major currencies, was down 0.2 percent at 80.703. The Australian dollar rallied on the China news, rising 0.4 percent to US$0.9416. The euro was flat on the day at $1.3519, 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, however, has been under pressure since remarks last week by Fed chair nominee Janet Yellen were widely interpreted as confirming her dovish stance. Since Yellen's remarks at her Senate confirmation hearing, U.S. Treasury yields have fallen, dragging down the dollar index, which is correlated to bond yields. But even though Yellen said the stimulus would be in place for some time and those comments were negative for the dollar, many market participants believe the greenback would start rallying before the Fed actually starts reducing its asset purchases. "We're generally bullish on the dollar in the bigger picture even though we don't expect the Fed to taper until March 2014," said Greg Moore, currency strategist at TD Securities in Toronto. "People would start buying the dollar in anticipation of that tapering." On Monday, Federal Reserve Bank of New York President William Dudley said he was "more hopeful" about the U.S. economy but also said he expected "very accommodative" monetary policy to be in place "for a considerable period of time".

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.