FX Roundup: Dollar up against European crosses, China's reserves plunge

The dollar headed higher against European crosses on Monday, as forex market chatter was dominated by the plunge in China’s currency reserves.

According to data released by the People's Bank of China, the country’s foreign currency reserves fell by $99.5bn in January.

Information published over the weekend also points to a decline of $420bn over the past six months as Beijing attempts to boost the valuation of its own currency - the yuan - and calm investor flight.

China’s current reserves, in the region of $3.23trn, are at their lowest since May 2012, but still remain the world’s largest chest of foreign currency holdings.

Schroders' chief economist Keith Wade said, “We do not see a strong case for the authorities to devalue the currency and are encouraged that the yuan has been stable since 7 January. In our view, it is likely that the authorities will have to reintroduce capital controls to maintain currency stability as domestic rate rises are out of the question.”

“Against this backdrop, we see our exchange rate wars scenario (where China devalues by 20%, triggering a reaction from others), as increasingly likely. The Bank of Japan’s introduction of negative interest rates in January can be seen as a response to the sharp appreciation of the trade-weighted yen since the beginning of the year.”

At the close of trading in China, before the start of the country’s week long lunar new year holiday on 5 February, a dollar fetched CNY6.5743, up 0.07%.

Elsewhere, at 1408 GMT, the pound was 0.68% lower versus the dollar changing hands at $1.4405, while euro was also down by 0.40% exchanging at $1.113. However, the dollar fell 0.44% against the yen changing hands at JPY116.36.

The dollar rose against a basket of commodity linked currencies, with the Australian dollar being the notable exception.

The Aussie was up a modest 0.07% against its US counterpart exchanging at US$0.7072 with the Reserve Bank of Australia holding firm on interest rates last week, but keeping the door open to further rate cuts in wake of the Bank of Japan’s move to introduce negative interest rates.

The New Zealand dollar fell 0.24% changing hands at US$0.6613, while the greenback also rose 0.12% against the Canadian dollar exchanging at CAD$1.3934.

Kit Juckes, head of forex at Societe Generale, said, “I'm still holding out for a further move up in EUR/USD after last week's break-out, though a risk-on mood isn't naturally euro-friendly. I want to stay short GBP is some form. Short NZD/CAD will be a constant theme for a while.”

Finally, the dollar headed higher against Latin American currencies posting upticks of 0.85%, 0.72% and 0.35% against the Colombian peso, Chilean peso and the Brazilian Real, exchanging at COP$3,361.82, CLP$709.85 and BRL3.9039 respectively.