FOREX-China short-term rates spike boosts dollar, yen, Swiss franc

Reuters

* Chinese money market rates weigh

* Soft U.S. jobs data cements view Fed stimulus to stay

* BoC drops rate hike reference, Canadian dollar tumbles

By Gertrude Chavez-Dreyfuss

NEW YORK, Oct 23 (Reuters) - The safe-haven dollar, yen and

Swiss franc all rose on Wednesday as risk appetite declined

following a spike in China's short-term money market interest

rates.

Concerns about soft U.S. jobs data for September, which

appeared to rule out a cut in the Federal Reserve's monetary

stimulus before next year and caused the dollar's plunge on

Tuesday, took a back seat, as Chinese money market rates climbed

to levels not seen since July. The People's Bank of China failed

to inject cash for a second day.

Rising liquidity needs for Chinese corporate tax payment

deadlines and worries about bad banking debt seemed partly

responsible for the jump in short-term rates, analysts said.

The rate spike was short-lived but caused a market panic

nevertheless, prompting a scramble for safe-haven dollars, Swiss

francs and yen.

"The weight of a weak U.S. nonfarm (payroll data released on

Tuesday) is surpassed by rising risk aversion on concerns over

China's money market. Profit-taking takes hold," said Camilla

Sutton, chief currency strategist at Scotiabank in Toronto.

The Canadian dollar, meanwhile, plunged after the Bank of

Canada on Wednesday dropped reference to any interest rate

increase for the first time since April 2012, citing weak

economic growth.

In midday New York trading, the U.S. dollar rose against the

riskier and commodity-linked currencies such as the Australian

and New Zealand dollars. The Aussie dollar fell 0.8 percent

versus the greenback to US$0.9629, while the New Zealand

currency dropped 1.5 percent to US$0.8385.

The euro was flat to slightly lower at $1.3778. On

Tuesday, it hit $1.3792, its strongest since mid-November 2011.

European Central Bank President Mario Draghi took a hard

line on the banks, saying on Wednesday a common mechanism for

dealing with troubled banks should be in place by 2015. That has

put a dampener on the euro.

The yen was also in demand, pushing the dollar down 0.8

percent at 97.31 yen and the euro 0.9 percent weaker at

134.06 yen.

Another safe haven, the Swiss franc, also rose, as the

dollar and euro both slipped 0.3 percent to 0.8924 and

1.2296 francs, respectively.

Against a basket of widely traded currencies, the dollar

index was little changed at 79.256. It fell as low as

79.137, its weakest since early February.

Still the outlook for the U.S. dollar remained downbeat.

Tuesday's September U.S. jobs report has pushed out expectations

for a reduction in the Fed's asset-buying plan well into 2014,

Scotiabank's Sutton said. That left the Fed's balance sheet

expanding rapidly while those of other central banks are

stabilizing or contracting.

A majority of U.S. primary dealers polled by Reuters now

believe the Federal Reserve will not start cutting its $85

billion of monthly bond purchases until March.

Strategists pointed to the Fed's Oct. 29-30 policy meeting,

which could indicate whether there has been any substantial

change to Fed policymakers' views on the economy.

Against the Canadian dollar, the greenback surged 0.9

percent to C$1.0378

"Sentiment could really turn against the loonie if investors

start to price in the risk of a rate cut as the next policy

move," said Joe Manimbo, senior market analyst at Western Union

Business Solutions in Washington.

Canada's central bank meets eight times a year, and the

final meeting for 2013 is set for Dec. 4.

EURO STRENGTH WORRIES

The euro has gained 4.4 percent so far this year against the

dollar. It recently hit a two-year peak against a trade-weighted

basket.

Strategists said if the euro's ascent gathered pace the ECB

could adopt some form of verbal intervention or other measures

to dampen its strength. A stronger euro is negative for the euro

zone's exporters.

"Euro/dollar is trading at new highs for the year and the

question is what will the response be from the ECB?" said Chris

Turner, head of FX strategy at ING in a note to clients.

"Euro zone headline inflation is low, and the ECB could

repeat its February stance that the strong euro increases

downside risks to inflation."

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