Dollar Plunges on China Central Bank Comments

The dollar dropped to record lows versus the euro Wednesday after comments by a Chinese official stoked fears the central bank of the world's fourth largest economy would reduce its holdings of U.S. assets.

The dollar's decline was broad, also taking it to all-time lows against a basket of major currencies, as sentiment worsened also in the wake of news that General Motors posted its biggest quarterly loss in more than two years, keeping alive expectations that the Federal Reserve could cut interest rates again next month.

"It's a mountain of negative sentiment for the U.S. currency. Comments from China overnight added to the dollar's already negative tone," said Omer Esiner, forex analyst at Ruesch International in Washington.

"You also have concerns about the health of the U.S. economy, the possibility for lower lending rates and the subprime mortgage concerns."

A Chinese central banker said the dollar was losing its status as the major global currency, and a top lawmaker said China should balance the make-up of its $1.43 trillion foreign reserves stockpile to take advantage of appreciating currencies.

China is the second biggest holder of U.S. Treasuries.

The euro raced to an all-time high of $1.4730 according to Reuters data.

"The next level (of chart resistance) is $1.4780. After that $1.50 becomes a target," said Esiner.

One-month implied euro/dollar volatility reached its highest since the peak of credit problems in August, indicating that the dollar's slide may be approaching disorderly territory.

"The case for the dollar is a very weak one. Comments from China, despite some backtracking, were perhaps enough to start the rot," said Steve Barrow, currency strategist at Bear Stearns in London.

Paulson Stands by Strong Dollar Talk

Meanwhile, the U.S. Treasury said on Wednesday that Treasury Secretary Henry Paulson stands by recent comments he has made about the United States' commitment to a strong dollar.

Asked about the dollar's slump on Wednesday, a Treasury Department spokeswoman referred to Paulson's recent comments on the dollar.

A week ago in New Delhi, Paulson said: "I'm strongly committed to a strong dollar."

Intervention Speculation

Analysts said any further weakness in the dollar would prompt growing speculation that central banks may step into the market.

A Reuters survey forecast a one-in-five chance of direct intervention by the European Central Bank either on its own on in conjuction with other central banks.

The dollar index, which measures the dollar's value against a basket of six currencies, touched a record low of 75.077, down around 10 percent since the start of 2007. It was last trading at 75.341, about 0.9 percent lower on the day.

Falling global and U.S. stocks on the back of General Motors' quarterly loss and the dollar's decline weighed on risk appetite, encouraging investors to unwind carry trades and boosting the yen.

Carry trades are strategies where investors fund purchases of securities in high-yielding currencies by borrowing in a low-yielding currency such as the yen.

The dollar fell against the yen, after earlier dipping to 112.79, the lowest level in two months.

Sterling rose to a fresh 26-year high of $2.1071 against the dollar. The dollar slid to 12-year lows against the Swiss franc at 1.1259 francs.

The currencies of natural resource-rich countries such as Australia and Canada were the biggest gainers from a rally in commodities that pushed gold to a 28-year high above $840 an ounce and U.S. crude oil futures to a record high on Wednesday, closing in on $100 a barrel.

The Australian dollar hit a 23-year high against the greenback at US$0.9398 after the Reserve Bank of Australia raised rates by 25 basis points to an 11-year high of 6.75 percent and left the door open for more tightening.

The Canadian dollar rose to its modern-day high against the U.S. dollar, which fell to 90.61 Canadian cents.

U.S. federal funds futures are pricing in a roughly 64 percent chance of a quarter point reduction in the fed funds rate target to 4.25 percent at the December policy meeting.

The Bank of England and the ECB, both of which will make policy decisions on Thursday, are expected to hold interest rates steady at 5.75 percent and 4.0 percent respectively.

Fed Governor Frederic Mishkin on Wednesday said that there will be a lot of home loan foreclosures in coming months, but a central bank should act to counteract negative shocks to the economy.

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