Euro falls vs U.S. dollar as China euphoria wanes

NEW YORK Tue Jun 22, 2010 1:59am IST

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NEW YORK (Reuters) - The euro fell against the U.S. dollar on Monday, while the Australian and New Zealand units pared gains, as yuan-induced euphoria faded amid doubts over the overall impact of China's pledge for a more flexible currency.

Beijing's announcement over the weekend, which should boost purchasing power and demand in the world's third largest economy, initially fueled a market rally worldwide. The currency move was seen helping global companies that sell to China and underpinning commodity-linked currencies such as the Australian dollar.

But the rally ebbed with no follow-through buying, analysts said, with China's move seen as having a minor impact and undertaken primarily for political purposes.

China on Monday ruled out a one-off revaluation and said it will reform its exchange rate regime in a gradual manner.

"It's basically inertia where the moves are not progressing and people have turned around and took it the other way. I would say the lack of follow-through after the China-fueled rally is leading to some risk aversion," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey.

"I think people are concluding that the China news would be a minor thing primarily for diplomatic window-dressing. China is doing this ahead of the G20 meeting primarily to defuse the situation there and hope that the G20 talks about other things."

Leaders of the Group of 20 leading industrialized and developing economies are to meet next week in Toronto, where global trade imbalances are expected to be a key issue.

EURO FAILS TO GET ABOVE $1.2350

In late New York trading, the euro fell 0.6 percent against the dollar to $1.2313, after earlier trading to a one-month high at $1.2490, according to electronic trading platform EBS. Traders sold the euro after it failed to get above $1.2350.

The single currency in recent months has moved with swings in risk appetite. On Monday, the 25-day rolling correlation between the euro and the S&P 500 was still at a robust 54 percent.

"The breakdown now leaves a potential key reversal pattern unfolding. A close below ($1.2354) would signal an immediate test on the $1.2290 and possibly as low as $1.2200," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.

The high-yielding Australian dollar gained 0.5 percent to US$0.8762, off an earlier one-month peak at US$0.8860.

One-month AUD/USD risk reversals, a measure of currency sentiment in the options market, were still showing a bias for puts -- suggesting expectation of further declines -- at -4.20 vols on Monday, from -4.425 last Friday. But Aussie risk reversals have come off extreme levels.

Two weeks ago, the put bias on the Aussie traded as high -5.875 vols, pressured by the negative global risk appetite arising from the euro zone debt crisis.

The New Zealand dollar rose 0.2 percent to US$0.7081 after an earlier high at US$0.7153, its strongest level since May 14.

Earlier in the session, the Chinese yuan closed at 6.7976 against the U.S. dollar, the highest closing level against the greenback since the yuan's July 2005 revaluation and up 0.42 percent from Friday's close of 6.8262. It hit an all-time intraday high since the revaluation of 6.7958, up as much as 0.47 percent from the central bank's mid-point, nearing its limit of 0.5 percent.

The U.S. dollar rose 0.4 percent against the yen to 90.99, boosted by steep gains in the Australian dollar/yen cross and New Zealand dollar/yen pair.

(Editing by Leslie Adler)

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