FOREX-China short-term rates spike lifts 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 Julie Haviv

NEW YORK, Oct 23 (Reuters) - The dollar, yen and Swiss franc

all rose on Wednesday after a spike in China's short-term

money-market interest rates drove risk aversion, driving bids

for the three safe-haven currencies.

Chinese money-market rates climbed to levels not seen since

July after the People's Bank of China failed to inject cash for

a second day, as regulators showed signs of concern that loose

liquidity might be fueling another found of risky credit

expansion.

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

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

francs and yen.

The move came a day after the dollar plunged as soft U.S.

jobs data for September appeared to rule out a cut in the

Federal Reserve's monetary stimulus before next year.

"The weight of a weak U.S. nonfarm (payrolls) 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 dollar also rose against riskier and commodity-linked

currencies such as the Australian and New Zealand dollars.

In afternoon New York trading, 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.

But the Canadian dollar 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.

The euro was little changed against the dollar after the

president of the European Central Bank, Mario Draghi, said he

wants to put in place a tougher stress test for

banks.

The euro was up 0.1 percent at $1.3792, matching

Tuesday's high, which was its strongest since mid-November 2011.

The yen was also in demand, with the dollar down 0.9 percent

at 97.24 yen and the euro 0.8 percent weaker at 134.08

yen.

The Swiss franc also rose, as the dollar slipped 0.4 percent

to 0.8912 franc and the euro fell 0.3 percent to 1.2290

francs..

The dollar index, which gauges the dollar against a basket

of widely traded currencies, was little changed at 79.256

. It fell as low as 79.137, its weakest level since early

February.

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

Tuesday's 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 outlook leaves 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 said the Fed's next policy meeting, on Oct.

29-30, could given an indication whether policymakers have

substantially changed their views on the economy.

Against the Canadian dollar, the greenback surged 0.8

percent to C$1.0374.

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

final meeting for 2013 is set for Dec. 4.

"A dovish statement from the Bank of Canada catches an

inattentive market. They increased the time it takes for

inflation to return to target and reduced potential growth,"

said Sebastien Galy, foreign exchange strategist at Societe

Generale in New York.

"They still haven't factored in the underlying deflationary

pressures in Canada but are clearly worried, adding some

emphasis on the risk of a housing correction," he said.

EURO STRENGTH WORRIES

The euro has gained 4.5 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 euro

zone 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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