Dollar eases as Paulson hits China on eve of banker meetings


By AFX News
via Interactive Investor (U.K.)
Wednesday, September 13, 2006

LONDON -- The dollar slipped slightly after US Treasury Secretary Henry Paulson issued a clear warning to China to allow the yuan to appreciate to better reflect its fundamentals.

His stance suggests that the US will pursue a hard line at the upcoming G7 meetings this weekend. The last time the group of seven most industrialised nations jointly called for greater currency market flexibility, the dollar suffered hefty calls while Asian currencies edged higher. Exhorting greater flexibility is usually seen as code speak for China to allow the yuan to float freely.

"Pulling no punches, Treasury Secretary Hank Paulson is recommending China swiftly enact economic reforms, with his emphasis on floating the yuan," said Jeoff Hall at Thomson IFR Markets.

Paulson also said China's current stance may attract a tit-for-tat retaliation.

"Paulson has admonished that failure to quickly adopt a flexible exchange rate or to ratify other reforms could result in a 'backlash' from other industrialized economies," added Hall.

Paulson's comments set the stage for this weekend's G7, IMF, and World Bank meetings. Last week a German official said the yen's weakness against the euro would be brought up at the meeting.

The dollar did not fall too far, however, as it benefited from declines in oil and commodity prices.

Benchmark oil prices in both New York and London stayed near six-month lows, some 20 percent off their peaks close to $80. Gold and base metals were also mostly lower.

Lower oil prices are expected to help US growth prospects.

At the margins, easing inflationary pressures in the euro zone also helped the dollar gain on the euro.

Analysts said consumer prices data from Germany, France, and Spain show that euro zone inflation is under control despite continuing pressures from high oil prices, economists said.

Elsewhere, the yen found some buying support after a mildly hawkish set of minutes from the Bank of Japan's last rate setting deliberations on Aug. 10 and 11. The minutes showed that all nine members of the policy board shared the view that the Japanese economy will continue to expand moderately and that consumer prices will continue to follow a positive trend, even though they left the benchmark rate unchanged at 0.25 percent.

In the UK the pound got another modest lift after some positive job market figures this morning, showing a fall in the number Britons making jobless claims.

The reaction to the data was somewhat muted given that Prime Minister Tony Blair had already hinted at the figures in a speech yesterday.

However, the pound remains well-bid after the pick up in the annual CPI rate was revealed yesterday.

Observers still predict another UK rate hike in November. The central bank lifted rates for the first time in two years in August.

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